Still not convinced that how you calculate your princes can make or break your business? Then, look at it this way!
Pricing – a critical aspect of business – often receives less attention during the start-up phase than choosing a logo. But, when it comes to your products or services, pricing is the sole measure of how much money you’ve made or lost.
Regardless of whether you’ve been in business for 20 years or 20 days. Remember this:
Price too high and no one will buy!
Price too low and profits won’t grow.
As pointed out in 3 Key Factors that Make the Difference between Success and Struggle,
it’s imperative that you don’t take the lazy route and charge what everyone else charges; nor do you pick a “warm and fuzzy” price out of thin air.
Accurate, i.e., “strategic” pricing does not require an MBA in Economics. If you have core knowledge and understanding of the following three factors, you can rest assured your prices will set your business on a solid track for growth and success.
Fixed Expenses
The true costs of your product are unique to you – like your DNA. Failing to understand how costs affect your business overall and your prices, in particular, is a recipe for disaster.
The fixed expenses in your business should be easy to calculate as long as you stay on top of your bookkeeping. These expenses are constant and predictable; this makes their effect on your cost simple to calculate.
Granted, there may be some variances, like higher energy bills in the summer due to air conditioning. These variances are still predictable. It’s very likely that your books will show that.
While the fees vary month-to-month, they are very similar when comparing year-to-year. Simply put, looking at June’s energy bill for the past three years will give you an excellent basis for what you can expect to pay in June of this year.
Fixed expenses aren’t considered a direct cost of creating your product(s) or services(s) but they need to be considered in your sales price. If you fail to consider these fixed expenses, then you will find yourself struggling to pay yourself and keep the lights – and A/C – on.
Variable Expenses
There are certain costs that are directly related to how much you sell, whether it’s a product or a service. These costs are revealed through a Bill of Materials (BOM), which is essentially a list of components and their costs that go into producing whatever it is that you produce.
Having a clearly defined BOM allows you to quickly determine how must cost goes into creating a certain quantity or volume. These variable expenses provide the baseline for the unit cost of your product. They should be known and therefore easy to factor into your sales price calculations.
Competition
The price for your product or service is dependent on the cost it takes to produce it, but it doesn’t exist in a vacuum. For this reason, it’s important that competitors’ and established market prices are taken into consideration when you’re pricing your product or service.
Ideally, once you figure out your costs, your sales price should be in the mainstream markets’ neighborhood. Of course, there will be variance between prices of the same or similar products. This relates to the unique characteristics of each business, yours included.
Use the market price as a guidepost. Stay closely aligned with market price(s) but only if your fixed and variable expenses are aligned with the pricing you devise on this basis.
If your price is below market value, it can be tempting to just run with it. And that may work alright. But invest time and attention in conducting true analyses to ensure that you’re not overlooking or disregarding a key cost or expense.
If you’ve done your diligence and your pricing is coming in above standard market prices, then you most likely need to do some cost cutting. Is there something that you could be buying in a smarter way?
Negotiations with suppliers aren’t considered an enjoyable part of doing business, (unless you’re into haggling) but they can help you save unnecessary costs. If your suppliers won’t negotiate, then it may be time to find a new vendor.
Bottom Line
The actual, verified costs that go into creating your product are crucial to determining the true price you charge to your customers. If your books are accurate and up-to-date, then this data is at your fingertips.
The expenses that your business incurs are a critical part of operations and are often the slow trickle that sinks the ship. A thorough understanding of the costs of doing business lets you make better, fact-based decisions that will allow you to reach your long-term goals.
In fact, if Vegas set odds on business successes or failures, the winning bets would always be on the business that has the most accurate and current financial records. This practice reveals many “bankable” traits – from an understanding of the various true costs to an instinct for timely and strategic response to internal and external trends.
The impact of knowing your fixed and variable expenses – and having access to your BOM – cannot be undermined. This requires having a natural knack or attraction to bookkeeping – which – let’s face it – most small business owners and entrepreneurs do not have.
If you’re one of them, not to worry. Still Waters Bookkeeping is in business just for you!
Don’t let your daily distractions deter you from giving your business and yourself one of – if not the – most powerful competitive advantages a business can have – professional Bookkeeping. The proactive bookkeeping services Still Waters Bookkeeping offers are within your reach and your budget. We’re just a click or call away.