Pricing for profit

In a keenly competitive small business environment, the price products and services are pitched at is often viewed by business managers as something they have little control over. Often the view is taken that "I know what the product costs and I know what my competitor sells it for, so my price must be somewhere between the two."

A business’s pricing decision directly affects a firm's profitability and therefore should be a decision made my management and not be a decision dictated to by competitors. Pricing is a function of overall corporate goals and can be a combination of one or more of the following goals: to increase sales, to maximise cash flow, to win market share or to lower demand to satisfy capacity restrictions etc. Whatever the goal is, it should be written down and reflected on when any related business decisions are made. As can be seen, pricing is a combination of marketing, sales and financial decisions.

Set out below are some of the management decisions business owners should consider as part of their businesses pricing policy that will help their businesses to survive and to thrive.

Cost

Cost is obviously the best base point to start in a pricing decision, but that cost consideration must be inclusive of all direct and overhead costs that must be covered by the sale

Customer

Whilst the customer is the ultimate judge of price, a customer does consider other factors in addition to price when purchasing a product or service. These factors can include the quality of the product, the experience of the service provider, the convenience of location, the existing business relationships etc. All of these factors give some ground for price flexibility

Competition

Do not always compare the price of the service to whom you think your competitor is, your customer may have a different view of who your competitor is and you should be aware though customer contact of exactly who you are competing with in the market

By managers of businesses being aware of the theory of product pricing and by being innovative enough to look at what people in other industries do about pricing (and thinking "would that work for me") they can take control of the price setting process. Success in this area is a major step in achieving a more profitable business.

Macks Advisory can assist members with management decision that may help businesses grow and avoid the pitfalls of insolvency. If you have a query, please contact Peter Macks of Macks Advisory 08 8231 3323, or by pmacks@macksadvisory.com.au.