Have you reviewed your pricing this financial year?
How often do you review your prices? If you haven’t looked at them yet this financial year then now may be the time. It is common for business expenses to increase throughout the year. Because of this, your profit margins may be reduced if you are yet to review your pricing. Across the year you may not notice the small increases in costs from suppliers slowly eating into your profit margin. By conducting a wider spread review of your pricing, you will be able to see how much all of these pricing increases add up to.
To help you out with your pricing review, here is a guide to calculating your pricing and noticing when it needs to increase.
How to calculate pricing
The method you used to calculate your prices when just starting out will likely not work once you are established. Many businesses use market averages or the amount their customers are willing to pay to determine their pricing. But as a more established business, you know the costs of doing business and have a presence in the market.
To start calculating your pricing you need to know your costs. Begin by adding up your fixed costs. These are costs that are generally consistent and are essential, such as rent, utilities, and wages. Each must be paid regardless of how much you sell.
Then you will need to know your variable costs. These will rise and fall depending on a variety of factors, including how many sales you are achieving. Variable costs can include the costs of buying the goods you need from your supplier and the costs associated with providing your services.
The two strategies for pricing
The next step is to use one of the following two methods to calculate your pricing. It is important that you have calculated your fixed and variable costs before this stage as it will affect your pricing. Here are the two methods you can use to calculate your pricing.
Cost-plus pricing is a simple method of calculating your prices. It takes the cost of producing and selling your products, then adds a percentage markup that becomes your profits. What percentage you choose for the markup can be determined by a range of factors including industry standards, what your customers are willing to pay, and the current market conditions.
There are some downsides to this method in that customers are able to compare prices and will decide what they believe is a good price. If you sell a similar product to one of your competitors and have a higher markup, you will have to justify that markup somehow.
This method is generally used for pricing products and in competitive industries.
Value-based pricing uses a more flexible method and is often more difficult to determine. It utilises the data you have on your expenses and combines that with what customers perceive as the value of your services. Due to this, there is a lot more market research to go into determining your pricing.
The important thing to consider is that these prices are heavily based on what customers perceive to be the value of your products or services. So, if you want to charge more, you will have to work to ensure you are showcasing the value they receive and delivering on it.
Because of its nature, value-based pricing tends to be used for services and products that cater to a need or offer convenience. Drinks purchased at a nightclub will always be more expensive due to the convenience of not having to leave to go get a drink.
How to know if your prices should be raised
There are many factors that you may be considering when it comes to a price rise. Ideally, you would be able to raise your prices with inflation or give a little hike when there are other expenses increases. However, this isn’t always the best route to take as it could often cause you to lose customers if done at the wrong time.
Some businesses may have little choice on prices if they operate in a competitive industry with larger players dropping prices low and locking them in. If you are in the scenario you should talk to a bookkeeper about finding other ways to streamline your business to increase your profit margin. At the same time, if your industry is slow at the moment, a price rise is probably not the best choice. But your business really needs to up the prices, so when do you know it is the best time?
If it has been many years since a price rise has occurred, then it is likely necessary that you need to increase your prices. The key to a price increase is to ensure your perceived value increases with it. Often, businesses have been adding, streamlining, and perfecting their service since they set their prices. If this is the case for you, highlight these changes, and let your customers know they are getting far more value for money than they ever have.
Pricing can be a tricky subject for many business owners. It is both vital to get right, but also difficult to determine what is right. Fortunately, there is a lot of help out there to ensure you can be paid the true value of your work, while also appealing to your target audience. Link Books are here to help you get the most money out of your business so you can achieve your business and life goals. Come have a chat to learn more.