What Every Entrepreneur Should Know About Pricing

Setting the right prices is now essential for small and medium-sized businesses to survive. However, they are not easy to set up. There is no guaranteed formula for how to do it properly. As you may have noticed in any of the previous articles, the cost of business are even in the same business domain entrepreneur from entrepreneurs different. It is related to many factors and also to the entrepreneur's personal perspective on the way of business – for example, with the company's equipment. Someone starts by taking all the assets immediately at the start of the business and then repaying them, another equips their company gradually. Another difference is whether you do business in a "brick shop or business" or if you have an e-shop or provide services on the Internet – you do not need as many employees and whether any, different are usually also taxes etc. And all this significantly affects prices.

The correct price of the goods or services is not a multiple of the wholesale price.

The entrepreneur often tempts to recalculate the price from the wholesale price only by conversion rate. If the entrepreneur proceeds as follows, it actually takes into account that all the costs for the sale are already included in the wholesale price. This is a fundamental mistake! So how to determine the right price? It is not that simple, and it is necessary to consider such issues as production costs, costs associated with sales, customer sensitivity to price, competition, etc. So how do you proceed? See the article: Build your pricing strategy for sales of products and services.

What is the difference between wholesale costs and cost of sales?

The wholesale price is inherently another cost of goods and not a selling cost! You must purchase the goods from the manufacturer or supplier. The price paid by the producer is thus only the part of expenses from many expenses for sale throughout the whole sales process and must be added. Take good care not to confuse the gross margin with the final proceeds from the business transaction. Before you start selling at all, additional costs such as wages, rent, transport, advertising expenses, maintenance, taxes and etc. must be added. Take good care not to confuse the gross margin with the final proceeds from the business transaction. This error is often the main cause of a loss-making business.  If the price does not cover all the costs of the sale, you pay the loss from your own pocket!

Each sale should bear an adequate share of the operating costs.

Again, we're at the gross margin. Many entrepreneurs are based on the assumption that the costs are fixed and if the gross margin is positive, it is "green for trade". But here is a fundamental problem in ignorance of what constitutes a solid--so-called fixed costs, independent of how much we produce or sell and what are variable costs – variables, dependent on the production or of the sale. Each of the prices thus must include an adequate share of all operating costs in order to cover them (you increase sales, need larger warehouses, more are lit, you recruit employees, grow phone and service expenses, etc).

Keep track of your pricing.

The analysis of sales and the success of your products on the market should be in your attention daily. You should know which products are the most successful and contribute the most to your overall profit, and you should know the products that are lossy.  But beware! Even this discipline is not an easy matter. We do this in another article. Although at first glance the product may seem lossy, it can cover a significant part of the company's fixed costs! By decommissioning such a product from the sales portfolio, you can also significantly getting worses in the overall results. Check your prices regularly and throughout the full context.

The lowest price is not always the best solution.

We see it every day. Many entrepreneurs are trying to get as many customers pandering to low prices. If such a price does not cost a thorough analysis and is only determined with a view to being the lowest, then it is often unprofitable and lead usually the entrepreneur to the bankrupt.

Beware of the price sensitive products.

Sensitive we can call those products that customers buy most often. such as food rolls, breads, etc. You will find such items in each sales field. Don't try to set as much margin as possible here. Carefully follow the competition and keep prices in acceptable values. Here, customers are very sensitive to the price, so you play for your reputation, name and of course the customers themselves. You'd better "do" it on other products. It is important that you identify your sensitive products.

We can abbreviated: sensitive products => reputation, other products => margin.




Build your pricing strategy for sales of products and services.

A number of smaller companies and entrepreneurs carry out an inappropriate way of prices calculating of their products and thus committing errors in the economic management of their business. This erroneous initial consideration is that the ratio of total costs and revenues over a longer period of time is not monitored.

Read more: Build your pricing strategy for sales of products and services.