Follow These Suggestions for Better Pricing Decisions1 min read
Every aspect of your business, including long-term viability, short-term profits, market share and customer loyalty are all affected by the prices you set for your products and services. There is no perfect answer to this important decision, but you can use the following tried-and-true principles as a guide.
Cover costs. At a minimum, the cost of producing the product should be covered in the price you charge for the item. Production costs vary by industry, but may include raw materials, storage, salaries, advertising, delivery, rent, equipment, insurance and taxes. On your income statement some of these will be categorized as “cost of goods sold” while others will fall into the “overhead” category. Production costs such as rent and utilities are relatively fixed and others like shipping and stocking fees are variable. One way to determine an appropriate price is by adding the amount of profit you want to earn as a percentage. This is called the cost-plus pricing method.
Know your market. You may consider hiring a research firm to develop detailed reports on competitors, markets, and forecasts for a particular industry or region. However, you may be able to use surveys and other methods to uncover customer perceptions about your product and service quality. These methods can also give you an indication of the effectiveness of your advertising, and provide comparison between the competition’s prices and your own.
Monitor regularly. You should continue to monitor the impact of price fluctuations on sales revenue. Charging more than a reasonable buyer can pay, or overpricing, may cause sales to be limited. On the other hand, underpricing may lead to unsustainably low profit margins or create the perception of poor quality.
For further advice that can help you manage your company profitability, please give us a call.
By Kathy Hopkins
Kathy has been a practicing accountant since 1985 and provides a vast repertoire of services that include budget comparison, reporting and analysis, QuickBooks® training, cash flow projections, financial analysis, compilations, reviews, audit preparation and management, as well as strategic planning.
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