Pricing of your products and services is a science and an art. The latter involves prices that end at 99 cents or 95 cents as well as keeping under certain spending levels such as $50 or $100.
The science side of pricing includes knowing what your costs are, your break-even price, and your needed markup that will give you a profit. Profits are a necessary thing if your goal is to remain in business long term.
In this blog, I just want to touch on four items often missed in calculating the cost of doing business. These include:
- Shrinkage/spoilage/theft – This category goes by various names and actually includes a variety of items that cost you money. Some of it is items that walk out the door. It also includes defective items. If your business deals with items that can spoil, then you need to take that loss into account.
- Returns – Not everyone who buys something will keep it. Some of it will come back in the door as a return. While you may be able to resell some, there will be items that you just need to absorb as a cost. In service work, this area may include work you need to redo for a customer.
- Sales – It would be great if everything you sold went for your full asking price. But we all know that won’t happen. So in developing your pricing strategy, you need to consider the level of discounting you will probably need to do at various times to move your goods and services. Product businesses are faced with “last year’s model” while service businesses often have slow seasons. And all businesses face variable general business economic conditions.
- Slow paying accounts – Wouldn’t it be nice if everyone just paid cash. But some pay with credit card and that means various associated charges. Still others may set up an account. Most of those accounts will pay promptly and on a regular basis. Others however will take their time in paying. Check out this article from Intuit for tactics on dealing with this issue – http://bit.ly/VIsGJc
The science aspect of pricing can be frustrating. The four items covered in this blog post do not cover all the areas impacting the pricing decision. It is meant to highlight some common areas missed and to help you, the owner, develop a solid pricing strategy that keeps you in business a long time.