Are your sales volumes growing but you can’t seem to turn a profit? Or maybe you’ve got a great product but sales just aren’t picking up? It could be a problem with your pricing strategy.
BDC Senior Business Advisor Alka Sood says there are seven key steps entrepreneurs can follow to establish a pricing approach that works for their business:
- Calculate your direct costs: Includes raw materials, duty, freight or shipping charges, direct labour costs, etc.
- Calculate your cost of goods sold or cost of sales: A simple way to calculate cost of goods sold is to add up your raw materials or product costs, wages, benefits, amortization expenses, and factory overhead.
- Calculate your break-even point: These include the costs of running a business and going to market regardless of your manufacturing or sales volume. Overheads are typically referred to as “fixed costs” because these costs don’t necessarily increase or decrease if volume increases or decreases.
- Determine your markup: Expressed as a percentage of cost of goods sold or cost of sales. It is set to try and ensure that the company receives a high enough gross or profit margin to be able to pay for its indirect fixed costs while also earning a target profit.
- Know what the market will bear: If your competitors have lower profit margins and you offer a higher price that would give you a higher margin, you could lose sales. How much you charge depends on your strategic position in the market. There is great importance in deciding ahead of time how you want to be positioned.
- Scan the competition: It’s key to know your marketplace. Competitors’ prices can have a direct impact on what you’re able to charge.
- Revisit your prices regularly: The business environment is constantly changing and that can affect your goals and margins. Annual budget setting is a good time to look at how your costs for inputs, energy, labour, interest rates, taxes, and more may be increasing.
For the complete list by the BDC, click here.