Tweak Your Biz » Marketing » Pricing for Profit. Part 2

Pricing for Profit. Part 2



In this post, the second in the “Pricing for Profit” series, we look at the difference between pricing and costing.

The importance of Pricing vs. Costing

One of the jobs that I had early on in my career was that of “Industrial Accountant” in a sewage pump factory. One of my duties was to cost out new products in conjunction with the design engineers in advance of a new product being manufactured.

Pricing vs. Costing

Reflecting on the position afterwards, I realised, as a matter of fact, (as opposed to a lack of professional confidence), that my position was one of the least critical to that team. This was because, by the time the product concept was given to the R & D teams, a customer need had been identified and a sales price had been set. It was up to the R &D staff to find a way to manufacture a product so that the company could make a profit. On occasion, this even necessitated a whole new manufacturing process or a new assembly line being developed. Cue the R & D engineers of assorted flavours. I merely checked the sums. I was costing, the engineers were designing. The critical job of pricing however, was the responsibility of the group marketing team.

Business theories, developed over the last 200 years, are responsible for the mistaken view that many entrepreneurs hold, that the more labour and / or cost that is put into a product, the more valuable the product becomes.
As noted in Part 1, your customers don’t care about your costs. They only care about the value that they get. However, one thing is certain, if you sell below cost you will make a loss and there is no business future in that.

Definitions

  • Costing involves working out the cost of what you sell to your customer. It is simply a numeric calculation. The main function of product costs in business is to value stock for accounting purposes and to keep an eye on product line profitability. Costing is really a historic function. Product costs shouldn’t be used solely as a basis for setting sales prices. However, you should know your product costs when setting your sales price, because, presumably, you don’t unwittingly want to sell below cost.
  • Pricing is a process that is more art than science, and although product costs have a part to play in that process, there are a whole range of other factors that should affect your eventual pricing decision. We’ll look at those factors in Part 3.

Unit Costing

Unit costs include all fixed costs and variable costs involved in bringing a product or service to the point of sale. Costs can broadly be split into two types, variable costs and fixed costs.

  • Variable costs are those that vary with your level of activity, i.e. the more you sell, the more variable costs you will incur. Some typical examples of variable cost would be raw materials, temporary staff or sales commission.
  • Fixed Costs stay the same regardless of the level of activity or volume of sales. Fixed costs remained unchanged over a given period. Some typical examples of fixed cost would be rent, interest on debt, insurance, business licenses and the salary of permanent full-time workers.

Contribution

All sales prices should ideally be set higher than your variable cost, and should make a contribution to covering your fixed costs and, of course, your profit. While selling above cost is a basic concept that everybody understands, it is a concept that is sometimes forgotten in a rush to simply make sales.

Pricing

if pricing were easy, no business would ever make a loss on a product line. However, the fact that pricing isn’t easy is no excuse for overlooking the basics. Calculate your costs and make sure you don’t price below cost. If your costs are too high, either reduce your costs or don’t sell the product.

Next time, in “Pricing for Profit”

Over the next two posts, I’ll outline the first steps you need to take in order to price your product for profit. I’ll also review special factors that affect pricing professional services.

In your opinion, how important is product cost in setting your prices?



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The Author:

Helen Cousins, a chartered accountant by profession, is a business mentor, trainer and consultant for a wide range of Irish SMEs, often working under the auspices of state agencies via her company Xcel Business Solutions. In a successful career spanning more than 25 years, Helen worked in accountancy practice for PricewaterhouseCoopers, and worked in Financial Controller and senior management positions in manufacturing industry, before starting her own consultancy for small businesses. Helen is also a self catering entrepreneur, operating her own self catering holiday home business in Wexford. She is a director and former Chair of the Irish Self Catering Federation, and she works closely with the tourist industry in Ireland. http://xbs.ie

Add Your Comment

  • http://www.tweakyourbiz.com Niall Devitt

    Thanks Helen, another great post! One area that is rarely added/factored in well in my opinion is time. I’ve been guilty of this myself in the past, in that I think we tend to consistently underestimate our own and others time when it comes to pricing. I’ve love to hear your thoughts in how this can/should be avoided?

  • http://twitter.com/xcelbusiness Helen Cousins

    Thanks Niall. Time is a biggie, and I plan to deal with that in part 4. I used to have to keep a timesheet when I worked in accountancy practice and time does not equal value! Professionals should price for value and throw time-sheets out the window. I’m not suggesting not to charge for your time, my point is that by using “time based thinking”, most professionals underprice their work, because they think they are selling time. Professionals do not sell time (or at least they shouldn’t!) If you consider how long it took perhaps for Beatles to pen, say, “Yesterday” and imagine if they charged u00a3500 / hr for that vs what they actually got – you may see where I’m going in Part 4. Some may not agree… :) n

  • http://www.tweakyourbiz.com Niall Devitt

    Great answer Helen! That’s what I love about the BT community, I am constantly learning from you all :)

  • Paula Ronan

    u00a0Thanks for some very useful and practical advice, Helen. We are actually putting some of it to use at the moment!u00a0

  • http://www.weberclean.com/ Kyle-Carpet Cleaning Fargo ND

    Thanks for the tips,as I am starting to build my social media brand  this article has a lot of great pointers and will help me with my business. Thanks Niall.

  • http://www.connorkeppel.com Connor Keppel

    Great post Niall. So many people rave about empty stats with no idea of ROI. It’s not just the digital realm either. Well done!

  • Susan Oakes

    Good points Niall especially number 3. Unless they are prepared  and trained all the planning, listening etc could be undone. It is kind of funny that as social media is at the basic level about human interaction some make it seem more complicated than it should be.

  • http://www.tweakyourbiz.com Niall Devitt

    Thanks Susan, absolutely! It’s always been about people and not technology :)  

  • http://www.tweakyourbiz.com Niall Devitt

    Thanks Connor, I keep getting asked; What a Facebook fan worth to my business? Fans are people and your customers are people so in-between must lie the value for your business. 

  • http://www.tweakyourbiz.com Niall Devitt

    My pleasure, thanks for the comment! :)

  • http://www.tweakyourbiz.com Niall Devitt

    Hi Simon, For me, the visionaries are sitting on 100 billion dollar businesses. The rest of us are simply trying to keep up :)  

  • DavidFitzgerald

    Nice one Niall

    How do you identify the most appropriate social channels?
    I hear it alluded to frequently but other that “group” searches what other strategies can be used?

  • http://www.appointmentsetting.com/ simonswills

    Dear friend, thats really so great and trustworthy of you. I don’t blame anything on any point. The main thing for any business is to keep it intact if its not growing more and faith is the biggest weapon.

  • http://www.tweakyourbiz.com Niall Devitt

    Thanks David, I’m guessing that you’re asking with respect to a niche market/industry? In the case of a very niche market… I’d probably use a combo of 1)  build a lighthouse (something of big value) 2) an integrated virtual & real world approach 
    3) plus a combo of the most obvious social channels, 
    for B2B: Content, Linkedin, Twitter 
    or B2C: Content, FB, Twitter. 
    But, in fairness ultimately the best answer lies in defining result you are looking for, that’s what puts the meat on the bones.   

  • http://twitter.com/marketingdebbie TheMarketingShop.ie

    Great points Niall, in particular number 3 – so many businesses start out and don’t really have a plan for dealing with that first crisis or unfavourable comment other than hitting the delete key which we all know is only going to make matters worse! 

  • http://twitter.com/#!/antonmccarthy Anton McCarthy

    Hi Niall, enjoyed the read! 

    On measuring the return on time spent on social media (e.g. working to gain new fans and followers), what kind of methods of tracking would you recommend? I think that social media can be a time sink for businesses, and I definitely feel that since it is so new, it’s really not easy for businesses (especially SMEs who can’t afford the most sophisticated tracking tools), to assess what they are getting from it!

  • http://www.tweakyourbiz.com Niall Devitt

    Honestly Anton, they’re the wrong type of goals in my opinion. As I said in the post, I’d make measuring fans part of the process, rather than the endgame. I don’t agree that it’s not easy for small businesses to measure social return and it doesn’t have to even be that sophisticated but it does require commitment and time. I mush rather spend my time, doing stuff that I can measure in real terms than doing stuff I can’t measure. It can be as simple as asking the question, in other words; say you are a hotel, create a coupon/discount (you can do this for free) for your Facebook community and record how many people use this and how much they spend. Now you can start properly analyse what Facebook is delivering in real terms. After some time, you can calculate what a Facebook is really worth. Say, the answer is 5 euro, next figure out the current cost of acquiring a fan (again in real terms). take one from the other and you have a mean for the value of one fan (say that’s 2 euro). Now start to work out ways that you can increase this value. 

  • http://www.tweakyourbiz.com Niall Devitt

    Including big business, which I always find less excusable but hey!

  • Debi Harper

    Aoife well done on your 1st post,brilliant and I totally love “If opportunity doesn’t knock,build a door” will share everywhere:)

  • Catherine

    Fab read great post and agree with Debi love thet quote

  • http://www.smartsolutions.ie/blog/ Elaine Rogers

    I believe (rightly or wrongly) that engagement on other websites (such as this for example) improves SEO and SEM, especially when we can include our SN, Blog and weblinks every time we comment. Would you agree with that?
    Great common sense pointers there Aoife, and welcome to TYB! 
    @smartsols_ie:twitter 

  • http://TheMarketingShop.ie/ Debbie McDonnell

    Great first post Aoife, lots of really useful information there.  If I could add one thing it would be to be very careful when choosing an SEO expert to work with your business.  Get a recommendation if possible as the right person will be good for your business, the wrong one will drain your cash and potentially damage your site in Google.

  • http://twitter.com/aoiferigney Aoife Rigney

    Thanks Niall! :) 

  • http://twitter.com/aoiferigney Aoife Rigney

    Thanks Debi! It’s exciting being part of Tweak Your Biz!! Thanks for sharing :) 

  • http://twitter.com/aoiferigney Aoife Rigney

    Thanks Catherine! :)

  • http://twitter.com/aoiferigney Aoife Rigney

    Hi Elaine, 
    Yes! I would totally agree with you there. By engaging with people on a variety of different platforms (using your SN, Blog and web links each time) it increases the number of inbound links to your website. This all helps your SEO but also your online brand reputation!

    However, I do have to say that unless your SEO is set up correctly using the basics in the above checklist, engagement on the various platforms is pretty pointless. Also, if Google Analytics (or similar) is not set up, you have no way of knowing which platforms you are engaging with, are worth your time! As we all know, time is precious! Working smarter not harder is key with SEO! Thanks for your kind welcome too! :) 

  • http://twitter.com/aoiferigney Aoife Rigney

    Thanks for your kind comment Debbie. 
    I would totally agree with you there – and I am so glad you brought it up!! 

    To be honest, if someone was calling themselves an SEO expert to begin with, I would be worrying! Let’s talk straight.. Nobody ACTUALLY knows how Google’s algorithm works when crawling websites, because Google keep it a secret. It is a guessing game! 
    So it is crucial to have an experienced person when dealing with your website. 
    If I was looking for an SEO expert I would: 
    1. Ask around. (Use all of your networks to get recommendations) 
    2. Check out their previous work 
    3. Don’t just go with someone because you have heard of them, they may be all talk and no action. 
    4. You are employing someone to work on one of the most important parts of your business. Make a contract (or agreed written agreement) 
    5. Also, just because they may be the cheapest, doesn’t mean you are getting a “good deal”!!!

    Hope that helps in someway… I’ve been doing Search Engine Optimisation for 2 years now, and I am still learning new things everyday! :) 

  • Elishbul

    Thank you for that ! Succinct and easy to follow for us non techies

  • Donna

    Thank you for this article.  At times I get lost in understanding SEO, it can be overwhelming, so much information, but sometimes confusing.  I like your instructions.

  • John Twohig

    Well Aoife, for somebody who thought her first post was not going to be very good, I think you have scored a direct hit. The post is excellent, simple to follow and well thought out. I agree with Anton when he says, it’s important to post content with your customer in mind, not many do.

    Welcome to TYB and keep up the good work.

    John, Munster Abu!!!

  • http://twitter.com/boozerevolution eric cross

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  • http://twitter.com/boozerevolution eric cross

    Also, check out
     http://www.cocktailcodex.comCheers!

  • http://www.mgtdesign.co.uk/web-design-northampton/ adam

    Social Business Strategy as a model is still developing, collaboration, values, authenticity and sharing are all key pillars to the successful adoption and implementation of the strategy.  Keep in touch with us.

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