By Samuel Rosenberg
MANY business owners fail to understand how to price their products or services within the marketplace so that their business becomes an inevitable success. On too many occasions, individuals simply look at what competitors are charging and try to undercut them to gain more business. This may not always be the best route to take.
Should you decide to charge more than your competitors, you must be providing better products and services. Where you are charging less than other organisations, your customers may wonder if you are cutting corners, paying your employees less or expect to hike your prices in the near future.
All businesses incur expenses, in running the business efficiently and effectively and for the purchase of goods that you will sell, eventually, to your customer. All owners consider their rent, utilities, labour cost, insurance and accountancy fees as part of the ongoing cost of doing business. A little part of each of these costs become part of the charge you are making to your customers for your products or services. When you complete your sales targets exactly, you will make a profit because you budgeted your sales correctly. Should you fail to meet your targets, your expenses may not have changed significantly and your profits will be lower.
One of the biggest failings within many businesses is to reduce their prices to match any actions and reactions by their competitors. When you are offering your products or services at a price that does not cover your expenses sufficiently, you may be making a loss on every sale. Conversely, should you overprice your products because you are selling them in high numbers, your customers may decide that there is a point in which they will purchase a competitor’s product, purely because it is cheaper.
You will see both reactions to the marketplace when a new grocery store opens in your neighbourhood. For a while they may insist on charging less than the other grocery stores, to try to attract customers. They may be losing money at this stage or at best breaking even because their prices are so low. As they increase their prices the customers may move back to the competitors.
It is a fine balancing act to ensure that your prices are correct and must be consistently reviewed. When you make mistakes within your pricing, you may make significant losses, which may be acceptable when you have sufficient cash flow to see you through a difficult period to establish a business, but must be set to a correct level for you to operate profitably over a longer term.
The pricing of your products is the single most important factor in your business’s financial health. It is necessary to know when your competitors are changing their prices, but only by understanding exactly what makes up your gross profit and expenses, can you price your products correctly and consistently review your outgoings, as well as your income.
Some businesses decide to make a loss or breakeven on one or two headline products to encourage customers to purchase their products or services. This means that your customers will be paying the correct price for the other items from you which may allow you to make sufficient profit and have a long-term healthy future for your business.
Samuel Rosenberg is the founder and CEO of Axcel Finance Ltd., the leading regional microfinance institution. Share your thoughts and email your questions to firstname.lastname@example.org