How to make sure your pricing is accurate
For an established business seeking growth, a regular pricing review can help to determine the right balance.
Pricing is an essential decision for business success. Price too high and you risk losing sales to your competitors. Price too low and profitability may suffer. For an established business seeking growth, a regular pricing review can help to determine the right balance.
Your pricing should take into consideration your business costs, what your competitors charge, what people are willing to pay, and reflect the value of your offering from a customer perspective.
It’s a delicate balancing act. Use this article to learn about pricing strategy, so you can develop one of your own to make sure your business is profitable.
Your business must cover its costs to earn a profit. In order to price accurately, start by figuring out your costs (or checking them again if you’ve been in business for some time).
Your costs should be organised into two categories:
The price you set must be higher than the variable cost of producing your product or service. Each sale will make a contribution towards covering your fixed costs – and contribute to your profit.
Now that you’ve calculated fixed and variable costs, you can figure out the best pricing scenario for your product or service.
A snowmobile dealership in Manitoba has variable costs of $9,000 for each snowmobile sold (including paying the manufacturer, compensating salespeople and doing pre-sale maintenance).
The dealership has fixed costs of $200,000 a year that must be covered. If the dealership sells 100 snowmobiles a year, it needs a contribution toward the fixed costs of $2000 per snowmobile to avoid a loss.
The owner of the snowmobile dealerships can elect any of these pricing scenarios.
There are other factors to consider when setting your pricing. For example, the value your business provides to the customer may affect pricing and help to improve profitability.
Here’s an example of how value can affect the pricing equation:
A marketing consultant must charge $100 an hour to cover his fixed costs. It costs him $20 in variable costs to drive to a client’s office to conduct a one-hour consultation (including fuel and parking). And he charges for travel time – in this case, a 30-minute round trip. But the client is thrilled with the consultant because the advice received will save the client several thousands of dollars. So, the consultant decides to charge the client $250 for the session – far more than the $170 he needs to break-even on the session.
Your pricing should reflect the value of the benefits that your business provides for its customers, while also reflecting the prices your competitors charge. Take the time to understand what your customers’ value from your business – you may be pleasantly surprised and feel you can charge more.
Be sure to check that your sales pricing policies fall within the legal requirements set out by the Competition Bureau in Canada.
(Source: With information from Infoentrepreneurs.org)