Getting your prices right can be make or break for your business and with all the online information available, customers are clued up now more than ever when it comes to getting a good deal.
This has always been a difficult area because it involves balancing your earning expectations with what your customer is willing to pay.
As accountants when we’re advising our clients we try to establish how much money they want to earn out of their business, how many hours they can do client work and what their overheads are.
Once we have this we can then work out what they need to make per product sold or how much they need to charge per hour, the final bit is then to consider if their customers would be willing to pay that and what the competition offer.
It’s never that easy and if you can’t charge your customers enough to make a decent living then you may have to look at other avenues like creating a value-added brand and marketing strategy to inform clients that while what you offer is more expensive they are also getting better quality.
Sometimes it’s also necessary to downgrade your product or service and consider what you can take out, how much it will save and what the customer perception of that is, there are often ways to cut costs without your customers significantly noticing.
I’ve had many heated debates with people in my network about offering discounts and the majority of people say that you shouldn’t undervalue what you have to offer by reducing its price.
I agree with them to some extent and it certainly makes sense for established businesses to focus on having a proposition based on quality rather than being the cheapest but it’s a very different story for start-ups who need to do whatever it takes to survive and then optimise things later.
It can be very difficult to offer some customer’s one price and others a different one without alienating people so when a promotion is taking place it isn’t unheard of for businesses to see significant increases in sales but make less profit than if they hadn’t had the promotion:
Normal – (Price = £20, Profit = £10, x 100 units = £1,000 of profit)
During a 25% off promotion with 50% increase – (Price = £15, Profit = £5 x 150 units = £750 of profit)
In this example there has been a sales volume increase of 50% but the business has made £250 less profit then if it hadn’t had the promotion at all, be wary of this phenomenon as it has caught many businesses out in the past.
Pricing and promotions are generally the toughest part of running a business and take the longest time to perfect, customers want to see a business acting with integrity and consistency so it’s important to pick a strategy and fine tune it instead of continuously switching between the two.
Thanks for reading our guide on pricing, as accountants based in Northampton we help our clients understand how much profit they are making and the best way to improve it, if you’re interested in finding out what it’s like to work with us then please get in touch.