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Pricing for improved profit

Review your prices to improve your profit and cashflow

On this page

  • Industry benchmarks and pricing
  • Understand what drives your customer to buy
  • Implement various price points
  • Focus on value

Industry benchmarks

Industry standards or benchmarks can be useful to your pricing strategy. For instance, if you have worked out what price you need to apply to your goods and the benchmarks show that on average in your industry, competitors have a larger gross margin, this may allow for you to increase your prices which will go directly to increasing profit.

Supplier Mark Up

Sometimes suppliers have recommended retail price which effectively means there is a fixed mark up on those goods. In this instance you will need to ensure that your gross margin will cover all your overheads at these fixed prices.

Sales / Volume Matrix

Of course we all know that if we are making good money on our products or service and we can increase our sales, then profit will increase.

Sales Volume Matrix, profitable,growth,lost leader, strategy 

This matrix shows that there are a number of alternatives when developing your pricing strategy.

  • profitable - where you have a high gross margin and low volume sales this should still deliver profit
  • growth – where you have high gross margin and high sales volume
  • lost leader - if you choose to keep your sales prices low and you have low volume of sales, this will eventually drain cash reserves due to low profit or even losses on sales. In some cases, businesses will offer some products at a low price with low margins as this product offer may 'bundle up' with another product to increase sales
  • this is an acceptable strategy as long as it is limited to a small portion of your offer and the balance of your business is generating enough profits to cover the loss
  • strategic – where the gross margin is kept low to attract higher volume of sales. This is often used as a strategic plan to increase market share which can lead to the ability to increase prices down the track.
What is most important for your business is to know which products or services give you the highest profit. If you know this, then you can skew your marketing efforts towards these to quickly and easily increase the profitability of your business.

Make sure you understand where your pricing sits on the pricing matrix at all times to ensure profitability.

Savings in cost of producing

Of course one of the more obvious areas to increase profit is to reduce the cost you pay for the goods. However, if you do shop around you need to be aware of what drives your customer to buy, ensuring that lower cost goods do not impact on your brand, quality, reputation or other key customer requirements.

Promote the value

When looking to improve profit through your pricing, it is interesting to note that anecdotal evidence suggest that you can increase your pricing by up to 5% without impacting on your sales. 

This may not apply to all businesses; however, it is important that if you increase your pricing you make sure that the customer understands the value on offer. 

For example, you have to actually 'spell' it out to them – 'this offer is worth $50, today you can buy it for $40'. Don’t leave it up to them to guess the value of your offer.

Hidden costs

You should review all costs associated with offering your product to the market – remember that storage and insurance can add up to 30% to the cost of products! Often there are hidden costs related to your products such as freight charges, packaging and as mentioned storage and insurance. You need to include these when setting your prices. 

Discounting

Lastly offering discounts directly impacts your profit, you need to understand how discounting works and do some numbers to see if it can work for you. There is a separate section that will provide more detail on the problems with discounting.

Mark-up versus margin

Often business owners and managers do not understand the difference between mark-up and margin. Mark-up is the percentage applied over the top of the cost and gross margin is the amount of money left to pay all the overheads. You need to set a mark-up that will ensure that your gross margin is achieved so profits are not being eroded by inadequate selling prices.

Having a standard mark-up percentage across all of your products may also start to eat into your profits, so you should look to set differing mark-ups on differing products, particularly if some are more expensive than others to produce.

Customer behaviour

You should know how sensitive to pricing your customers are. The product or service you offer may be a 'nice to have' which means that your customer will probably consider the price when looking to purchase. However, if they are looking for quality product or great service they may be prepared to pay a little extra to get what they want. If they are looking at other key areas as well as price then this will  give you flexibility to differentiate your offer from your competitor.

Various price points

Where you have different margins on different products, this will expand your offer and if your competitors drop prices on a particular product you may be able to focus your marketing efforts on other products on offer, rather than go head to head with your competitor.

Focus on value

Most customers have favourite suppliers or stores and this is where you should focus your efforts. Giving them value for your offer that will differentiate your offer from your competitors will have them coming back for more and not looking solely at the price point.

An important point to make is don't be afraid to drop a product or service line that is not profitable, it is better to focus on the profit making areas of your business than chase money that is disappearing!

If you do have a good pricing strategy and you follow these guidelines you will be consistent with your approach to pricing and the strategy will  provide the flexibility to avoid a price war.

Case Study: Advice on pricing strategies

'Good research and a good plan helps you make sure your pricing strategy lines up with your target market.
Shelly Collins, Galerie Montmartre

Read more Advice on pricing strategies

Shelly Collins sitting in front of vintage posters