Are You Pricing Right?

small business accounting advice

Pricing is always a tricky area to get correct and a lot of businesses shy away from it. When buying a product or service you want to receive good quality and value. Your pricing should reflect this. I think it’s even more important at the moment when there are limitations on what we can buy and where we can go. Consumers are becoming more loyal to those businesses they can trust to deliver what they want and need.

I noticed last week that a café local to me was open for takeaways and had a table and chairs outside.  I was really excited and went over there with Neil, my partner.  To say I was disappointed is underestimating my feelings!  I ordered apple pie and custard – my all-time favourite – and the portion was so small I could have fitted the whole lot in a small cup.  The pudding itself tasted lovely but it was far too small.

I know it’s important to watch your portion size and charge to cover the cost of the ingredients, especially at these times when income is limited and there is so much uncertainty, but it is crucial to keep the goodwill of customers.  I will never recommend this café because I know you don’t receive value for money.  People who know me well know that I love going to cafes and will always recommend a good one!

Does your pricing reflect what you provide for your customers? Is what you provide considered good value for money?

small business accounting advice

Hi, I’m Anna Goodwin – Author of five books, and Director & Mentor for Anna Goodwin Accountancy. From running my own business, I know it’s important to set the correct prices for your products or services; but it’s a challenge for most businesses.

Getting the price wrong will make a significant difference to your turnover and profit. I look at this more fully in my latest book, Your Business Your Numbers.

You need to give some thought to your targets.

What is the purpose of your pricing? What do you hope to accomplish?

These are the main pricing goals:

  • To maximize profit: to improve current profits, as opposed to long-term profits.
  • To maximize revenue: to maximize current revenue without consideration for profit margins, and the intention is usually to maximize long-term profits.
  • To maximize quantity: to sell as many units as possible or serve as many people as possible in order to decrease long-term costs.

Preparation Is Key!

  1. Do you understand the market well enough?
  2. Do you understand your product or service well enough, including all associated costs?
  3. Are you dealing with a basic or a premium product?
  4. Do you understand your ideal customer well enough? Who do you want to attract?
  5. Who are your competitors, and have you checked your competitors’ pricing?
  6. Can you distinguish yourself from the competition?
  7. What is the image you want to display?

Seven Biggest Mistakes In Setting Prices

The common theme with most pricing issues is risk: risk setting prices too high and you may push potential customers away; risk setting prices too low and you cut profits.

In order to decrease these risks, it’s best to get as much information as you can about your market, your customers and your own numbers.

Here are 7 mistakes to avoid making:

  • Pricing too low and undercutting all the time. Going in too low all the time can have a great effect on your turnover figure, but it can destroy your net profit, and this is the one you will need to survive!
  • Using the same margin for all products. In reality, slower moving, more expensive items need higher profit margins.
  • Not understanding the difference between margin and mark-up. Margin is always based on sales price. Mark-up is always based on cost.
  • Forgetting to take all costs into account. In order to price correctly – every cost needs to be identified e.g. credit card processing fees and delivery costs.

Have you included all your costs in your pricing? Some of these may be different to your normal costs in a socially distancing world.

Fixed costs
  • Office rent
  • Insurance
  • Loan interest
  • Salaries
  • Advertising
  • Broadband
Variable costs
  • Salaries
  • Materials
  • Packaging
  • Credit card/PayPal fees
  • Delivery costs
  1. Finding out what your competition charges and doing the same. Price for value.  Then you can defend your price against the competition, with a list of why your offering is worth its price.
  2. Setting sales commissions based on sale prices vs. percentage of profit.Commission based on turnover vs. commission based on the net profit directly impacts profitability
  3. Discounting instead of adding value. Discounting takes a toll on profits.

In the current world of social distancing, setting yourself apart from your competition is an opportunity. Businesses large and small have shown real creativity in how they are overcoming any obstacles. Sometimes, this may mean that customers are willing to pay more. However, you have to know your customers before you make this decision. On the other hand, there may be a temptation to reduce prices in the current climate to attract customers. However, this is not necessarily the answer. It may not be about reducing your prices but about adding value. A local grocer was providing a bunch of flowers with each purchase of plants last weekend. It went down very well with customers.

Take a close look at your pricing and consider whether it is right for you and your business. You may be surprised!

Next week will be all about understanding your accounts and why this is so important to the success of your business.