Pricing for profit
During the recession, many small companies cut their prices to stay afloat. But, as the economy grows stronger, consider increasing your prices and fees charged for services.
Many small business owners tell me they think they’ll lose customers if they raise prices, but it’s not true. Most happy customers and clients know you are in business to make money and need to bump up prices once in a while.
Determining what to charge for what you sell or do is a perennial challenge for every small business owner. Big companies have entire departments devoted to purchasing, procurement and pricing. But small companies just figure it out through trial and error. Most retailers traditionally double the price of goods sold, but for many other businesses there is no set formula.
The first step is to know exactly how much your direct competitors are charging for similar products or services. It’s easy to check prices online, but if possible, send someone out shopping. Read advertisements closely. Subscribe to your competitors’ newsletters. Watch for sales and special offers so you know what you are up against all the time.
Once you know what your competitors are charging, carefully calculate what it actually costs you to produce your product or provide your service. Review every invoice to determine what you are paying for raw materials, labor, packaging, shipping, etc.
No matter what you do, know your ‘cost of goods sold’ or COGS. This includes all your costs, including labor. If you’ve added a few part-time workers or contractors, be sure to add in those labor costs. The cost of gasoline is rising and may be close to $5 a gallon this summer, so you are most likely paying more for shipping and deliveries.
Reviewing actual expenses takes time, but it’s critical to your success.
Here are some important business equations:
Sales minus the Cost of Goods Sold = Gross Profit
Gross Profit minus Marketing, Operating, Administrative Expenses = Net Profit
Gross profit has to cover all your costs of doing business, including marketing, labor, taxes, rent, etc. Remember, we are all in business to make money, so if you are losing money or breaking even, you probably need to adjust your prices upwards.
So, once you’ve crunched the numbers and have the true cost of providing goods or services, you’ll have the information you need to recalculate prices or fees.
I recommend being honest about price increases. You might notice how some companies manipulate prices in stealthy ways. Remember when yogurt cups used to hold eight ounces? Now, they hold six ounces. Check the net weight of crackers, chips and cereal. You may be surprised at learning you are paying more for less.
Finally, depending on how you deal with customers, send a letter or email outlining why you are raising prices. You can maintain some flexibility by ‘grandfathering’ in current prices for long-time customers or offering them a discount on bulk purchases.
Take some time this summer to do these calculations. You’ll be glad you did. For more specific information, here’s a link to a good article about pricing.