Business Strategies

Price too low and you work hard for thin margins. Price too high and customers go elsewhere. Pricing is one of the few levers that affects profit immediately, yet many small business owners set prices by guessing or by copying a competitor. A more deliberate approach pays off.

Start With Your Costs

You cannot price well until you know what it costs to deliver what you sell. Separate your costs into two groups:

• Direct costs: materials, labor, shipping and anything that rises with each sale.
• Overhead: rent, insurance, software, utilities, administrative pay and other costs you owe whether you sell or not.

A price has to cover both, plus the profit you need. Owners often forget to count their own time, payment-processing fees, discounts and returns.

Know Your Break-Even Point

Break-even is the sales volume at which revenue equals total costs. If you know your fixed costs and the contribution each sale makes after direct costs, you can calculate how many sales you need before you make a dollar of profit. If that number looks unrealistic, either your price, your costs or your plan needs adjusting.

Common Pricing Approaches

• Cost-plus: add a markup to your cost. It is simple and protects your margin, but it ignores what customers are willing to pay.
• Market-based: price in line with competitors. It keeps you in range but can start a race to the bottom.
• Value-based: price according to the benefit the customer receives. This often supports higher margins when you offer expertise, speed or results that others do not.
• Tiered or packaged pricing: offer good, better and best options so customers can choose the level that fits.

Consider the Customer's View

Price sends a message. Very low prices can suggest low quality, while higher prices may signal premium service. Think about who you want as customers and what they expect. Compare your offering honestly with alternatives, including doing nothing.

Test and Revisit

Review prices at least once a year. Costs rise, and prices that were fine two years ago may now be eating your margin. When you raise prices, give customers notice, explain what they receive, and watch sales and profit afterward. Sometimes a modest increase costs a few customers but improves profit overall, since each remaining sale earns more.

Watch the Margins

Look at profit by product, service or customer, not just total revenue. You may find certain items bring in sales but lose money once all costs are counted. Good bookkeeping makes this analysis possible.

We can help you analyze your costs and margins. Contact our firm to talk about pricing for your business.