The prices you charge can have a dramatic effect on sales and profits. They can influence how customers respond to your product or service. Pricing can mean the difference between success and trading at a loss.
Consider these two pricing factors:
You can get valuable guidance by conducting research on the market reaction to similar products or services as your own.
Compare buyers’ risk on each product or service you research. You could charge a higher price if you can reduce or reverse the risks of your product or service.
To some degree, your price will depend on the competition. Look at your competitors, the key benefits and features of what they offer, and any points of difference you can see in your own product or service.
If you’re able to offer more (for example, better quality or more features), you can afford to charge a higher price.
An appropriate pricing strategy complements the position of your product or service. For example, a high price will likely suggest a premium value to your customers.
Cost-plus is a necessary starting point to avoid under-charging. Simply calculate your production costs and add the amount you need to make a profit. Just make sure you’ve calculated all your costs. Consult your accountant to ensure accuracy.
Cost-plus will tell you whether the prices are viable. Charging less than the direct cost of a sale can lead to a significant loss, while charging more than your direct costs will see each sale contribute to your fixed costs (or overheads) and towards a profit. The contribution each sale makes will tell you what volume you need to sell to reach break-even.
However, cost-plus doesn’t take into account:
Consider these factors before making your final pricing decisions.
It’s useful if you can benchmark your costs against industry averages, like gross profit and net profit margins. If your margins are below industry norms, it could suggest your costs are too high or your prices are too low.
Industry margins also give you a rough guide to the prices you could achieve when considering new products. Consult your accountant for help with benchmarking figures.
Varying prices can increase your profitability. You could:
Most accountants warn against discounting. Once you actually work out how much extra you need to sell to cover a discount, their concern becomes understandable. This is why you never start a discounting battle against stronger competitors – nobody wins except the customer.
However, discounting can work in certain circumstances. For example, clearance discounts can help you sell off old stock, release working capital and improve cash flow.
Increasing prices and therefore margins can sharply increase your profits – even if your turnover drops. However, you should always explain to your customers why you’re increasing prices and give them fair warning, especially if they need to budget for the increase.
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