By Aida Andersen, GroYourBiz Kamloops Chair
In order to develop your business into a successful, stable financial position, you need to understand the numbers of your business. They will enable you to understand exactly where your business financial health is. Accountants & bookkeepers are there to help you gather the numbers, YOU are responsible for leveraging these numbers to understand where your business is and how to get it where you want it to be – and keep it there. Knowing the numbers is also beneficial if you are looking for capital or for an exit strategy.
One of the most important numbers that you should know every detail about is the price of your product or service. How did you set that price? Is it the right price? Should it be higher /lower?
When you sell a product or service make sure to understand exactly how to price it and then go out there and ask for the price that is right for the value that your providing. Who are you serving by under pricing your product? Do you think customers buy because something is cheap? Think again.
Be honest and think carefully of this question: Do you know how to price your product or service?
In my 20 + year career as a business coach and consultant, I have had asked this question of each and every of my clients. The interesting trend is that most of my female clients get a bit embarrassed when we start talking of money and prices. Women business owners for some weird reason find it hard to price their product or service. They tend to be “afraid” of setting a price that might “offend” someone. The result is that many of them under price their product or service and end up running a business at a deficit.
When asked how a price is set, I have gotten the answer that prices are set based on a best guess; some have even answered that they found out what competitors were charging and then just figured out if they asked a lower price, then they will outcompete the competition. Wrong again!
For each product or service there is a formula of how to set the right price. A very simplistic way of calculating the price of your product is to figure out what your Production and Fixed Costs are. There are many more numbers to consider, but just for the sake of understanding why it is so important to calculate how to price a product, consider the following:
Production costs. These are the costs of goods/services sold. Exactly how much does it cost you to put the product in the hands of your customer. Let’s assume that it costs you $5 to produce a bottle of shampoo. You may sell the shampoo for $10 or $15, but $5 is your production cost. Now before you can go on to set the final retail price, you must consider your Fixed costs. These are the costs you incur each month whether you sell a single product or not. These include salaries to permanent staff, rent, utilities, professional services. Every expense your business incurs in order to stay open; whether you make a single $ of sales or not. These include wages, office expenses, shipping, marketing, delivery, professional fees, your hourly rate, etc.
Now each unit you sell must pay a proportion of the fixed costs. So let us assume that your fixed costs are $100 per month, and assume that you sell 500 bottles of shampoo per month, then you need to add $.20 to the production cost of your shampoo i.e. production cost $5 + share of fixed $.20 = $5.20 per shampoo bottle. That means that if you sell a bottle of shampoo for $5.20, then you are going to make $0 in profit. Technically speaking, if you sell your shampoo at $5.25 then technically you are making a profit. However, that is an extremely slim margin and a bad business model. Actually, you should consider selling your shampoo for ca. $15.
The important lesson to learn here is that once you start making this type of basic calculation, you are well on your way to understanding the numbers of your business and thus will be able to set your retail price based on facts instead of feelings or wild guesses.
Aida Andersen, Ph.D. has a passion for learning and teaching. She enjoys seeing others grow and reach their true potential. As a Certified Business coach, she puts all her experience and knowledge into work to help her clients succeed in achieving what they aspire to, both professionally and personally. www.aidacom.ca