Price for Profits - NOT Turnover...
Your Goal is to Maximise Profits - Not Sales
Below are just a few of the mistakes many owners make when setting prices.
Mistake 1. Forgetting To Pay Yourself FIRST:
You and your time is as (if not more) important than any other. You are not a free resource. You need to include both your wage and a profit distribution in your costings.
Treat yourself like another entity and pay yourself first.
If you imagine yourself as another creditor you can easily make payments to your own accounts on a regular basis just as you do your bills. Set up an "savings" amount - (at least 10% of your earnings) - and keep it in a savings account each month. This is a great habit to develop. It will become an automatic procedure as time goes on since you find yourself doing it out of habit.
Mistake 2. Discounting:
A trend among Business owners is to observe how their competitors are pricing their Services and Products - and then price theirs in the same manner. Many take this concept one step further, and actually reduce their prices as compared to their competitors.
The first and most obvious problem of this pricing method is that it eats up your bottom line profits. So although your sales may look good, Your profit doesn't.
And there is no guarantee that Your sales will look good in the future either. Many people perceive cheap - to be just that - cheap. They believe (rightly or wrongly) that the low price is related to poor quality. Thus instead of increasing sales, you will actually end up losing many of your customers, which may push your profits down even further.
Did you know that if you lower your prices by 10%... You need to sell 33% more to break even?
And if you discount 20%... You have to sell twice as many items to break even!
Are you making this mistake and losing money?
If you're going to lower your prices by 10%, you better be absolutely sure that you sell more than 33% as a result!.
The Real Cost of a Discounting
(At 40% Margin)
5% Discount... Sell 14% More
10% Discount... Sell 33% More
20% Discount... Sell 100% More
30% Discount... Sell 4 Times As Many
40% Discount... YOU NEVER BREAK EVEN
Mistake 3. Don't Confuse "Mark-Up" with "Margin":
Knowing the Difference Makes a Difference in Profits
To simplify defining the two, think of them this way: margin is based on the resale price of the product while mark-up is based upon the cost.
Margin: The percentage margin is the percentage of the final selling price that is profit.
Markup: A markup is what percentage of the cost price you add on to get the selling price.
i.e. 25% Margin means a larger profit than 25% Mark Up because mark up is calculated before your overheads and other costs are paid whereas margin is calculated as pure profit after your overheads and other costs are paid
If you buy an item for 10 and sell it for 15 your mark up is 50% your margin is 33.333%
Mistake 4. Calculate the Full Cost of Labour:
Your staff cost you far more than their weekly wage. Don't Forget:
- Sick Pay
- Public Holidays
- Bonuses - Incentives
- Quaility Care Adhearance
- and etc!