Are You Charging Enough?

"Build a better mousetrap, and the world will beat a path to your door." ThatÂ’s how the saying goes, but how do you know whether itÂ’s the mousetrap or the product thatÂ’s bringing buyers to your door? For that matter, how do you know if youÂ’ve priced your product fairly? We will be discussing pricing strategies in this article.

Blame it on the Manufacturer

If you are in the retail business, a good starting point is the manufacturerÂ’s suggested retail price (MSRP). Sometimes, thatÂ’s the only place to go. For example, a bedding manufacturer might establish the price at which you are to sell their product and you are not allowed to offer it for any less.

Most often, however, the MSRP is exactly what it says – a suggestion. In competitive markets, you might have to go below that to get the sale or you might just want to price a product to bring customers in to see it.

If you are bidding against other competitors, you most likely will not be able to use the MSRP. Whatever the reason for a variation, the MSRP is often just a starting point.

The End Justifies the Price – Sometimes

What drives traffic to your store? Is it catchy advertising, great prices or service? For grocery stores, itÂ’s typically a little of all three. When they run a special on eggs for 59 cents a dozen, do you stop and wonder if they are making money on them? You donÂ’t really care if they are; you just want the cheap eggs. The store probably is not making much on that offer, but meat and other products will help them turn a profit.

The eggs are loss leaders designed to get you in the door. The store is banking on you buying other groceries once youÂ’re in the door. The same happens with furniture stores and other retailers. Why wouldnÂ’t you want to do the same thing? The trick is to find items that will pull the customers in without giving the store away.

Do it the Old-Fashioned Way

The old-fashioned way to set the price of your product is to calculate the cost and then determine a reasonable markup. But how do you determine the true cost of your product?

In retail, the true cost is typically the purchase price plus shipping costs. The reasonable markup is what your competitors are charging. One way to determine a reasonable markup is to look at your bottom line. Ask yourself this question: Will the sale of my product at my targeted volume and planned price cover all my expenses, pay me a decent salary and provide a reasonable net income for the company? If the answer is yes, your pricing strategy is probably in the ballpark.

If you are a manufacturer, you can ask yourself the same questions; however, the inputs are more complicated. You must calculate the fixed costs (unchanging regardless of how much you produce) and the variable costs (raw materials, energy usage, etc.) of production. Whole books have been written describing the proper calculation of manufacturing costs. Suffice it to say that you might need a good cost accountant to help you determine those figures.

Other Considerations

Pricing is part of your overall marketing strategy. As such, you have to ask yourself what you are trying to achieve. Do you want to maximize sales by selling products for less? Do you want to maximize profits? Do you want to move old items? Each goal will require a different pricing structure, and you might have to practice until you get the mix just right. If you are just starting your business or struggling with your current pricing strategy, give us a call. We are here to help you make the right decisions.

Have a wonderful March.

These articles are intended to provide general resources for the tax and accounting needs of small businesses and individuals. Service2Client LLC is the author, but is not engaged in rendering specific legal, accounting, financial or professional advice. Service2Client LLC makes no representation that the recommendations of Service2Client LLC will achieve any result. The NSAD has not reviewed any of the Service2Client LLC content. Readers are encouraged to contact their CPA regarding the topics in these articles.

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