To price my product for profit needs to be done with understanding all the correct variables.
The correct price of your product can thereby result in the difference to your business surviving or thriving!
Product pricing is important aspect of any business to get right . As a small business accountant we are often asked am I making enough from selling my product? Why is my profit not that good? How do i price my product?
Let’s take as an example my company exclusively makes fresh creamy ice cream and how their pricing will impact on the bottom line.
Costs per product:
Raw materials $2
Total Cost per tub $5
The cost of production your icecream is $5 per tub . Overhead cost of rent, admin and other expenses = $200,000 per year. These would be your fixed costs
The factory can make 3000 tubs per month average =36,000 tubs pa
The cost to make = $180,000 plus $200,000 admin = $380,000
Based on the costs above, it costs $10.55 cost per tub to produce
How do i price my product to make a profit.
Your icecream will retail at $15 per tub = $540,000 therefore profit = $160,000 pa
Based on this simple example, we can see at producing maximum capacity, the profit for the ice cream owner is relatively healthy. Let’s say he only manages to sell 30,000 tubs
Cost to manufacture = $150,000 + $200,000 = $350,000 . The revenue for selling 30,000 tubs = $450,000
The example shows profit has reduced and this will impact on the bottom line
Pricing needs planning not random guessing or reacting to your competitor!
Careful planning is required for product pricing . Ask yourself when You price my product is it value , exclusive or aimed to be a loss maker. Pricing entails knowing your market. Pricing is a balance . Thereby charging too much may result incustomers not buying from you. However charging not enough will result in your profit reducing. Sometimes to the point your business becomes unprofitable. Pricing needs to take into consideration your overheads fixed and variable . Only then a final price considered against market factors.
Here’s how to set your prices
- Understand your customers . Ask yourself why do your customers buy from you? Your product price can be determined by demand for your product .If your customers may not be able get eonigth of your product and production is at a premium then so is the price. The classic example is the toilet paper shortage in Australia where demand exceeded supply. The price of toilet paper increased.
- Look at your product and compare it to your competitor. Don’t just match your competitor’s prices without first understanding your market and how the quality fo your product stacks up.
- Think about factors such as supply prices of your ingredients when determining your rate. The cost of some products can impact significantly on the amount of your product. Understand your overheads that also need to be covered by sales.
- Work on capacity and how the number of units will cover production and fixed costs
- Your reputation for quality and service should be a factor around setting your price. A cheap product has a lower price.
- Watch the market. Prices can change quickly. You may not have realised why you have been undercharging or overcharging for your product. Make sure you can understand if there is an oversupply
- Old product is sometimes sold at a lower price just to move it . This allows room for the new, improved product to reach the customer.
Strategy to increase profitability.
Much small business doesn’t like reviewing where pricing strategies. It takes courage to up prices. I recall one of my clients had not put their prices up for a couple of years. They asked me why their profit was in decline. It was a simple situation where overheads rose, and their revenue did not. We sat down and overpriced their product. Within a few hours of the new prices on their websites, they managed to obtain a successful large sale.
Your strategy needs constant focus!
Pricing strategy is essential for small business to grow. Correctly pricing your product will ensure the viability of your business and reward your product success buy pricing it accordingly
Need help contact Geoff and lets zoom in and discuss
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