Pricing for profit

There are those who say that the Apprentice bears no reality to business, I disagree. The mistakes I see the candidates make are mistakes I observe small business owners and start ups making all the time. I’ll own up to having made a few of them myself. The latest programme was no different!

The task was to design and sell a coach tour, the team that made the most money would win. The key to success lay in getting the price right and costs under control, isn’t that the fundamental challenge for all businesses? The big mistake that the losing team made was to pluck a price out of the air without any thought of costs or profit targets.

What can small business owners learn about setting prices?

In this task the Apprentices had a limit on the number of sales they could make as there were only 25 seats on the coach; this is a challenge many small business owners also have. Those of us who sell time for money have a limit on how many clients we can serve in a day, week or year. Restaurants and hotels have a cap on how many guests they can accommodate at once. Gyms are restricted by the space and number of pieces of equipment they have. When there is a limit to how much we can sell there is also a limit on how much money we can make so we need to factor this in when setting our prices.

I often challenge my clients to decide how much money they want to make in a year. We then look at how many hours they can reasonably work or how many customers they can cope with. We then divide the income target by the number of hours or customers to work out what the hourly rate or average sale should be, that gives us our starting point for setting prices.

Pricing for profit

What price should you be charging?

The next step is to work out all costs, both direct and indirect. Direct costs would include things like ingredients or materials, labour to produce etc. Indirect costs include a contribution to rent and utilities, insurance etc. This may seem obvious but too many people leave things out, especially time or things like packaging materials or small items that seem insignificant for each sale but mount up if not factored in. Now we should have an idea of our target sale price so we can start to look at how realistic it is.

Is your starting price high enough?

The mistake that the losing team made was that their starting price was too low leaving them no space to discount and remain profitable. Whereas the losers charged £60 per ticket the winners set their price at £90, they were still making a good profit on tickets discounted to £60 but the losers had no profit when they discounted to £40.

So if you are likely to be asked for discounts or want to sell packages as a ‘better deal’ make sure that your starting price is high enough for you to cover the discount as well as your costs and income target.

Of course working this way may bring you to a price that is too high for the market to bear and we have to look at other ways to achieve your income target but that’s another story…

Glenda Shawley has spent the lat 22 years helping people to start and grow small businesses on their own terms. Specialising in marketing planning and implementation Glenda works with clients one to one or in small groups. To see how Glenda can help you to start or grow a small business book your free 30 minute, no obligation, consultation by emailing consult@thetrainingpack.co.uk NOW.

 

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