How To Determine Pricing For Your Goods Or Services

1. How To Determine Pricing For Your Goods Or Services

2. As far as important business decisions go, the price you decide to charge for your goods or services, is about as important as it can get. For new businesses, a pricing strategy must be carefully considered, and for those businesses already up and running, profitability can be improved with periodic reviews of pricing. The difference between cost and value Understanding this can help a business increase their profitability Cost – this is the amount you spend to produce your goods or services Price – what you are rewarded with financially when providing the goods or services Value – the worth of your goods or services to your customers ● ● ●

3. When establishing pricing, it’s important to consider the value of the benefits provided by your business for your customers, while also keeping in mind what prices your direct competitors are charging their customers. 7 steps to take for a pricing strategy that works By following the steps outlined below, you could elevate your business and stay happily in the red: 1. Calculate your direct costs These include what you pay for raw materials, and don’t forget to take duty, freight charges, and labor costs incurred when producing goods or providing services, into account.

4. 2. Calculate the cost of goods sold or cost of sales These both represent how much it costs you to produce your goods, or provide a service that is ready to be sold, and for manufacturers and retailers, your ‘cost of goods sold’ can include direct costs, in addition to others like freight, factory overheads, and general supplies. For transporters or wholesalers, included in your ‘cost of sales’ would be direct costs, along with other costs like equipment, labor, and facilities such as garages or warehouses.

5. By adding up your raw materials or product costs, wages, benefits, and factory overheads, you can easily calculate the cost of goods sold. 3. Calculate the point at which you break even When adding up the costs they need to cover, some business owners neglect to factor in the cost of overheads incurred when selling goods or services, even though these can have a direct impact on profitability. The cost of running a business and going to market no matter how small your manufacturing or sales volumes may be. Usually referred to as ‘fixed costs,’ overheads don’t always go up or down according to increases or decreases in volume, and to accurately calculate your break-even point, these indirect costs need to be included.

6. 4. Determine your markup Expressed as a percentage of the cost of sales or goods sold, the markup is set to help make sure that a business gets a gross or profit margin that’s high enough for them to pay their indirect fixed costs, while still being able to turn over a profit. Markups are frequently used by businesses in wholesale or retail, to easily price items when many different products are being sold. Deciding the size of your markup can be determined once you have all the relevant data regarding the cost of goods sold, and your break-even point.

7. 5. Know what the market will bear It’s important to understand that selecting your markup shouldn’t be based solely on maths, as if your direct competitors have profit margins that are lower, and you’re offering a price that’s higher to give you a higher margin, you could lose out on valuable sales. Your strategic position in the marketplace will have a significant impact on how much you can charge for your goods and services. It’s also important to keep in mind that selecting a pricing strategy for goods, is not always the same for services, so be sure that your prices reflect the value of what you’re offering.

8. 6. Assess the competition It’s always good to keep a close eye on the competition, no matter what type of business you’re running, as what prices your competitors are charging, can have an immediate impact on what you can charge. Get to know your competition intimately to get a better understanding of the going rate and how you might be able to differentiate yourself from them.

9. 7. Regularly revisit your prices With the speed at which the business environment is changing, your goals and margins can be greatly affected, and setting an annual budget can be a great time to study all of your costs and see how they may be increasing. Should you need to raise your prices to cover those costs, it’s always best to be open and honest about the fact with your customers. Note that this is a very brief and basic guide to pricing for small businesses, and further assistance can always be gained from a financial advisor or even a tax and accounting expert.

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