What price is right?
The price you set for your product or service is one of the most crucial business decisions. Setting a price that is too high or too low at best will limit your business growth. At worst, it could cause severe problems for your sales and cash flow.
If you start a business or have an established business, selecting the right pricing strategy is essential in designing your business model. Established businesses can enhance their profitability through regular pricing reviews.
How to set a strategy
When you set your pricing strategy, you must ensure that the price and sales levels will allow your business to be profitable. As such, pricing strategy is likely to take significant thought, research, planning, and analysis over the life span of your products or services. It is certainly worth taking note of where your products or services stand when compared with your competitors.
So how do you identify what to charge for your products or services? And how do you choose a price point that is competitive and profitable for your business?
You have to know how to do certain things for your business grow:
- Find and win clients.
- Meet your sales and revenue targets
- Cover your operation costs, outlay, and operation cashflow
- Make profits and get a return on your investment.
But how does all this come together to identify your sale price? The answer is to have a unique understanding of your costs, margins and pricing and know your target customers. It is also necessary to discover what your competitors provide and what they charge.
Let’s have a look at the different ways that a pricing strategy can be determined:
Cost Price
When you offer a product or deliver a service, you have to spend money to do that. These expenses include the raw materials, business outlay, and the labour costs of producing your product or service. By counting these expenses and dividing them by the number of pieces you delivered, you get your cost price. In other words, it is the overall cost of your product before any margin or profit is added.
Wholesale price
Margin is the amount added to the cost price to make a profit. So, if your cost price per piece is $5, you might sell each piece to a wholesaler at $7.50. By doing this, you can easily cover your product’s production cost and make a profit of $2.50 on each piece. If you want to sell it directly to the consumer, you might make more profit.
Retail price
When you sell your product or service directly to a consumer and compare prices within the market to ensure you are competitive. So if you sell directly to a consumer for $10 and your production cost is $5, you will make a profit of $5 for every piece you sell. But if your competitors are selling for $5, you will need to reconsider your entire process.
Premium or economy pricing
Identifying how to position your product or service in the market is vital. Are you selling a premium product or service with a high price tag or an economy product or service with a low price tag? There is a significant difference between selling a low number of pieces at a high price and selling a large number of pieces at a low price. Deciding your prices between these two polar ends of the pricing range is not easy and will take time, experience, and lots of experiments to get right.
Knowing when to discount or increase your prices
Your product’s price is not a fixed thing. The production costs will increase, markets will change, and sales campaign will need discounted prices. So, it is essential to assess, review and update your product’s prices regularly. For example, you can run a discount campaign to improve sales, decreasing your profit margin, and selling more units. The most crucial factor for pricing strategy is to know how price-sensitive your customers are and what they are willing to pay for your products or services.
Do you need help?
Accountants 2 Business can help you determine a pricing strategy. Book a one hour meeting to learn more. Call on 07 3823 2344 or fill out the form below.
We provide a range of specialist business accounting services designed to save you time and money. Operating out of Capalaba near Brisbane and servicing businesses from all over Australia.
Note: This article contains general information and has not considered your particular circumstances. Before you decide based on this advice, you should consult with an adviser, whether any action is appropriate to your financial circumstances. In addition, the examples provided on this site are only for illustrative purposes
