Pricing to Profit: 5 factors to consider

  04-Dec-2018
 

How much is your time worth? So many small business owners under value their time and end up earning less per hour for their efforts than they might earn working shifts at McDonalds. Have you reviewed your pricing lately to ensure that your time is valued correctly?

Pricing is a vital element of your business strategy

Your business strategy should start with how you set your price, so understanding the key factors you need to include in your cost and pricing models is essential. Reviewing these regularly as your business grows and changes is important as the cost of doing business can increase. If you aren’t keeping up with your costs, your margins might be lower than you think.

Knowing if your new idea or enterprise has commercial value and will make money - and when you’ll start to see a profit – is also critical to your future success.

Factors to consider before setting prices

Here are 5 key factors to work through to determine your actual cost of doing business before you set your pricing:

Fixed or ongoing basic costs - these are the costs of just opening your doors for business, no matter what type of business you’re in. They include accounting, and or accounting systems, bookkeeping, legal costs and contracts, insurances (public liability, professional indemnity, product liability etc.), registrations, licences and certifications, business management systems (CRMS, scheduling & workflow management systems, CAD programs etc.), rent, fixtures and fittings, maintenance and utilities, IT and the building of your products (R & D). Don’t forget your company tax and GST.

People costs – this might include permanent and/or casual or subcontracted staff salaries or allowances, your own wage, and superannuation. It could also include vehicles or equipment and PPE your people will need to perform their work, as well as training costs.

Cost of goods or services (related to your specific business type). If you’re a consultant or tradie that may be time spent with the client, and travel time to and from the client’s location or jobsite. In a product business it would include the widgets you sell and the cost of production. In addition, any parts or materials you need to deliver for the client job, including freight/delivery, stationary, printing work books, hiring venues or storage etc.

Sales and Marketing - Many businesses put an arbitrary figure into their budget for marketing, without planning the marketing in detail - which means you could end up spending well over the expected budget. Instead, have a strategic marketing plan and budget (including cost of acquisition per customer, campaign marketing expenses, website, social, PR, print, etc) and a sales strategy (which is different to a marketing strategy), in place before you set or review your pricing. It’s essential to set a real figure for the cost of acquiring and retaining your customers. And with your marketing plan in place, be sure to measure your results – if you don’t, you won’t know if your cost per acquisition is on track, or what ROI your campaigns are yielding.

Other costs that get forgotten – these include merchant fees, currency exchange rates, travel costs and costs associated with updates and maintenance of your products, vehicles/equipment, app or website. Don’t forget to add the profit margin % above the cost price that you need to make.

Other streams of income

When setting prices most business owners consider only their core income stream. However, there are potentially other passive and active income streams that can be created. These could help you keep your price competitive without reducing your overall business income. Exploring these as part of your business income model should be an action every business owner takes to maximise their income opportunities.

Unless you’re running a charity you’re in business to be profitable. To be profitable you need to make sure that your income is greater than your costs – and to do that, you must know your costs thoroughly. Make it a priority to set aside time to review your costs and margins and ensure that your business is on track for profitability.

 

About the author: Kerrie Sheaves is Managing Director at Foundational Business Pty Ltd. Kerrie helps micro and small business owners to grow and improve their businesses.


 

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