Your Pricing Policy and Profitability
The pricing policy you use in your business is an important factor when it comes to overall profitability. Selling goods at the highest possible profit margin does not necessarily generate the maximum profit. The maximum profit is the result of many factors including sales volume, product cost, operating costs and, of course, price.
For instance, price increases may result in fewer sales and yet still yield a higher overall profit for the business. In other cases this approach may result in decreased profits. On the other hand, reductions in prices that result in sales volume that is substantially increased may produce an improvement in profits.
When it comes to making a pricing determination, the first factor you need to know is the cost of doing business as well as the product’s cost per unit. This may require some detailed research and analysis to come up with some accurate estimates. You will not be able to determine these numbers with 100% accuracy, but it should be as close as possible.
It does, however, need to be fairly accurate since failing to calculate all actual costs properly to ensure that the profit margin is enough to cover those costs is a frequent cause of business failure. Many business owners actually end up selling their products at a loss without even knowing it.
The estimated cost of finished or raw materials, labor, indirect overhead, and research and development must be determined before setting the final selling price of items. These factors must be re-evaluated as costs fluctuate.
Regardless of the strategy that is used to maximize profitability, the method for costing products is basic. It involves four main categories: Direct Material Costs, Direct Labor Costs, Overhead Expenses and Profit Desired.
You can determine an items minimum acceptable price by combining these four factors. For a more thorough explanation of these factors visit the resource listed at the end of this article.
Of course, pricing your product to achieve some level of profit is only one of the factors that needs to be considered in a business plan. Once you have figured out your costs, your break even point and your minimum profit requirements you will also want to consider your sales strategy. To succeed in a competitive market most businesses use three major sales strategies (sometimes all at the same time).
Determining a products price involves many considerations. Even though many businesses try to compete on price alone this is not the only option. Often a business can avoid price wars by finding a market niche that is not being served well enough or by offering a more effective solution. No matter which approach you take, however, it is essential that you recognize and fully analyze all of the costs involved in your product to determine it’s pricing.
Tags: finance, pricing products, accounting, marketing