Getting pricing right
- Costs fall into two categories – fixed and variable
- Fixed costs are the essential costs of doing business, including rent, wages, interest and utilities
- Variable costs fluctuate depending on sales volume. They include the cost price of a product (or an hour’s wages for a service business)
- To break even, your sales have to cover your costs
- Identify your unique selling proposition that will keep customers coming back. Is it price, quality, service or convenience?
- Establish how sensitive your market is to price changes. Can you increase prices without losing business? Will a small price reduction increase sales?
- Consider whether you are running a high-turnover or high-margin business. This determines whether you can get higher profits from low or high prices
- Establish what your customers are willing to pay. You have to charge what the market will bear
- Ensure your pricing structure can generate the return on investment you want
- Aim to maximise profits rather than sales
- Low-margin, high-turnover businesses (like supermarkets) should drive sales volumes as hard as possible, especially in a competitive market
- Small business can benefit from focusing on their most profitable customers and offering a value-added service with a higher margin
- Forgetting to pay yourself – include your salary and owner’s distributions in the price you charge
- Cutting prices to win business – may work in the short term, but is rarely a sustainable strategy
- Confusing mark-up with margin – a 50 per cent mark-up on cost of goods does not mean a 50 per cent profit margin. If you buy something for $1 and sell it for $1.50, your profit is 33 per cent (less other associated costs)
- Forgetting the full cost of labour – include leave, public holidays, payroll tax and super as well as salary in your calculations
- Discounting without doing the numbers – useful for turning over stock, but you have to know exactly how many new sales you need to compensate for the cut in profits
As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on the advice, consider its appropriateness to your circumstances. View our Financial Services Guide (PDF 59kb).