Pricing strategies and how to set the best price to benefit your company
It’s clear to us in the Lombard Accountants office that getting your pricing right is crucial to ensuring your business. Setting your prices too high and your customers may desert you; put them too low and you’ll generate sales but won’t have a large enough profit margin to create healthy revenues and cash flow for the business.
Here are some tips from the Lombard Accountants team looking at different ways that you can set the best pricing structure for your business:
- Cost price – when you make a product or deliver a service, you need to spend money to do that. This expenditure includes the raw materials, the business overheads and the labour costs of creating your product/service. By adding up all these expenses and dividing them by the number of units you delivered, you get your cost price. In other words, it’s the total cost of the unit before any margin or profit is added.
- Wholesale price – your margin is the amount you add on to your cost price to make a profit. So, if my cost price per unit is 5, I might sell each unit to a wholesaler at 7.50. By doing this, I recover the cost of making the unit (or ‘Cost of Goods Sold’ in accounting terms), and I make a profit of 2.50 on each unit I sell to my wholesale client. This is the wholesale price – as the wholesaler will then add on their own margin in order to sell it to a consumer at, for the sake of argument, 10. You make 2.50 and the wholesaler makes 2.50.
- Retail price – this is the price when you sell the product to a consumer, having factored in margins and comparing prices within the market to ensure you’re competitive but still turning a good profit. So, if you sell direct to a consumer, at a price of 10, and your cost price is 5, then you’ll make 5 profit for every unit you sell. This contrasts with 2.50 profit per unit if you sell to a wholesaler, although you’re likely to sell in bulk in this scenario and will make your profits through this economy of scale.
- Premium or economy pricing – knowing how to position your product/service in the market is important. Are you selling a premium product, with a high price tag? Positioning your prices between these two polar ends of the pricing spectrum isn’t easy, and will take time, experience and plenty of experimentation to get right.
- Knowing when to discount or increase your prices – your price isn’t a static thing. Costs of production will increase, markets will change and sales campaigns will require discounted prices. So it’s vital to continually assess, review and update your prices. What’s important here is to know how price-sensitive your customers are, how loyal they are to the brand, and what they’re willing to pay for your specific products/services.
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