The Power of Pricing to maximise your profitability!
In business, one questions that all business owners struggle with is…….
What should I charge for my products or services?
You will come across many fancy terms for pricing strategy, which include things like “Price skimming, Penetration pricing, Competitive pricing, Premium pricing, Loss leader pricing, Psychological pricing, Value pricing”. Now these are all great theoretical strategies and can be useful if you are launching new products and wondering how to set the price for this wonderful new product or service.
But for the rest of us, THE MOST IMPORTANT THING WHEN SETTING OUR PRICES IS PROTECTING OUR MARGIN!
This means that at all times you must make sure that your business remains profitable.
For example, assuming for your business to breakeven, you need an average margin of 50%. Then you need to take the direct cost of our products or services and mark up by at least 100%. when preparing your pricing. Any less and you are damaging the business and losing money.
If your new strategy is to focus on your margins then your business will benefit enormously.
- You will eliminate low margin products or services.
- Identify the higher margin items and start focusing everyone’s time on selling these and delivering them to your customers.
- New products or services will be priced based upon the margin they can achieve.
- Staff will follow the lead of the pricing strategy that is set out for them and everyone starts thinking the same way.
Below is an example of how focusing on your margin when pricing your products or services impacts the bottom line:
Focus on your gross margin and avoid sacrificing any of this margin by reducing your prices.
Obviously there will be times when you will need to discount out of date items or slow moving items etc.
But in general, you should be making this up on better margins to cover these normal business activities that you know will happen from time to time and always associate a cost to them.
Taking this road, will ensure your business will become more profitable and improve the cash flow of the business.
For more business tips visit our other blogs which include the Risks and Benefits of Outsourced accounting service, visit our other learning hub HERE