Depending on who you ask, there are several ways to price goods you sell through your business. A common practice among small businesses is to simply add a margin to the cost of goods. This is a quick and simple way of pricing, though has some pitfalls. Depending on the nature of the product range you offer, the margin between your wholesale cost and that which the consumer is willing to pay may vary considerably.
Paper products and motor oils are two examples where, traditionally, manufacturers don’t pass on discounts to wholesalers. They do, however, pay a fee in the form of a reimbursement if a target number of units are sold throughout the year. This means that a flat markup applied to this type of product may price you out of the market.
Alternatively, if the margin is sizable and there is good profit to be made, you may be under-pricing the goods. How is this bad? Well, from a consumer point of view it’s not, though you could be making even more profit throughout the year if your price was just a little higher.
Big businesses – the type that can easily afford pricing analysts to tell them what they should be charging for something – apply a methodical approach with scientific precision. Any offering, either product or service, is fully costed into the business. Then, research is conducted via sample groups, online information and competitive offerings to determine what the perceived market would pay. This approach achieves a couple of key elements in good business practise. First, the pricing will achieve a maximum profit for the business, whilst not being sufficiently high enough to drive consumers into the arms of competitors.
Second, it instantly provides an outlook as to the lifespan of the offering. If the perceived margin is low, then it’s future may lie in an ability to negotiate the wholesale cost of goods down. If not, it may be better to not offer it moving forward.
Finally, it will create a scorecard of profitability. This should form a key component of any marketing and sales strategy. Promoting the latest offering with a low margin will not provide the same return on investment as continuing to promote a higher margin one.
For most small businesses, a level of research commensurate with available funding should be employed. There is a plethora of websites around that will list whatever it is you wish to sell, allowing a very quick range of minimum and maximum prices to be determined. Deciding where to place your business within the range needs to be considered against the basics of selling – what is the availability in the market you are selling to, what is the demand of that market and what volume do you think you can sell?
Once you have set an initial price, it is critical to set regular pricing review dates also. The whole process needs to be repeated to ensure you can identify whether your margins are fluctuating and whether any competitors are undertaking activity that will affect your trade.
This is a highly analytical side of any business and whilst it may not stir the passions, or even form a core activity that supports the reasons for going into business in the first place, it will ensure that you can set, monitor and track the profitable health of your enterprise.
Mike Johnson is a Group Sales Manager and has over a decade of corporate sales strategy and experience under his belt. He currently drives the number 74 sports sedan.