At LBW Chartered Accountants we provide with assistance and advice on a wide range of business issues. Here are some of the key points to consider when setting prices.
One of the most important decisions to be made when launching a product or service is setting the price. Sometimes, this is also one of the most difficult decisions.
Ultimately, you will want to make as much profit as you can from each sale, with prices set at the highest point possible before demand starts to decline. But numerous factors will influence your pricing structure. For a start, you must consider your business objectives: for example, if your aim is just to maximise profits, you may set a higher price than if your objective is to increase market share or grow sales.
Here are some of the issues you need to consider:
A popular and simple method of pricing a product or service is to calculate the costs of producing it and add a profit margin. For example, if it costs £10 to make a product and you decide on a mark-up of 50%, the sale price will be £15 (and the gross profit will be 33.3%).
However, when using this method, it is important to take into account all costs. Some 'direct' costs will be obvious, such as stock, materials, employee wages, storage, packaging and delivery. But you must also be aware of 'indirect' costs, such as rent, utility bills, insurance and depreciation of equipment. You may need our advice when analysing your total costs.
In addition, using this 'cost-plus-profit' method alone fails to take into account such factors as competition, market trends and the needs of the customer.
Customers buying standard products available from numerous sources will generally look for the supplier with the lowest prices. This makes it difficult for the small business to compete with large corporations, who can mass-produce and purchase in bulk.
Consequently, many successful small businesses do not even attempt to compete by lowering price, but instead focus on other areas such as perceived quality, customer service or uniqueness of brand. Indeed, if you are marketing your product or service as high-quality or 'luxury', customers will expect to pay more and a cheap price will actually harm sales.
Sometimes, you might want to set different prices for what is essentially the same product. This may be done in a number of ways, such as:
As you can see, there are many different issues to consider when setting a price. It always pays keep an eye on your pricing in relation to the competition, and hopefully be one step ahead.
If you are looking for support and help from experienced accountants and business advisers, contact LBW Chartered Accountants.Last modified on