Setting profitable pricing from the outset one of the fundamentals to business success. Knowing the difference between gross profit and net profit is essential to building a profitable business.
Here are our Top 5 Tips for setting profitable pricing for your product or service:
1. KNOW ALL OF YOUR COSTS:
When developing a new product or service, deep dive into all of the costs involved with producing that product or service. Include cost of materials, freight, licenses, insurances, branding/labelling, packaging, labour etc. Be really thorough and capture ALL costs associated with bring your product to the customer.
2. KEEP AN EYE ON CUSTOMERS:
Research competitors products to see what they are selling similar products for. Write down things such as their inclusions, added extras, quality, product features, their brand equity etc, so that you can make an accurate comparison with your own offer.
3. WHAT IS THE PRICE CEILING?:
Don’t rely on your competitor’s pricing as the gospel for what the market is willing to pay for a product. Do your research and see whether customers will pay more for adding more perceived value to your product (for example, offering same day delivery may allow you to rise the base prices of your product as it is more convenient for customers).
4. CAN YOU INCREASE EFFICIENCY?:
Once you have a clear understanding of all of the costs associated with your product, look at your supply chain and see if there are areas that you can make more efficient. Can you modify the packaging so that more items can be packed into the carton with less empty space? Can you tweak the type of material used for a component without compromising the quality?
5. EQUATIONS COUNT:
Gross Profit = Sell Price minus Cost. It’s simple, but it’s an equation that many forget. The higher your sell price and the lower your cost (without compromising quality), the more gross profit you’ll make. Simple as that. Now with your gross profit, you must take into account your running costs of your business, and deduct these to understand your net profit to make sure you’re in the black.