This strategy is concerned with one primary objective – balancing the product with how much you can charge for it. Some businesses will charge what they think people will pay for it. You, however, have them at an advantage – your research has indicated what price level your customer would be interested in paying for your product (refer to your buyer behavior research).

Knowing what you are going to sell will give you your gross sales. What is going to be your profit? To make more money, it does not necessarily mean you need to make more sales. You can always decrease your expenses. However, this is not a long term solution. By decreasing your expenses, you will improve your bottom line – for a while. Sooner or later though you will find that you cannot reduce your expenses anymore without sacrificing something you cannot afford to lose. Meanwhile, your income has stayed the same, or perhaps reduced, and you are still in the same situation. This approach is like a downward spiral, turning inward. Reducing expenses is a valid business strategy, in CONJUNCTION with increasing sales.

Have a look at your profit margins. More specifically, have a look at your NET profit margins. This is the amount of money (as a percentage) that is left in the business after paying the cost of goods, fixed and variable overheads. For each product line you have, write down what the profit margins are. This will give the best indication of what product you will want to promote the most.

You can also look at ways in which you can increase your profit per product line. It might mean finding a different supplier or renegotiating with your current supplier for a better rate.

Let’s take a look at Steve’s results.

Profit Margins

Green Goods 8%
Fresh Goods 11%
Meat 8%
Deli 18%
Other 9%
TOTAL 100%

Even though Green goods have the highest amount in sales, the Deli product line gives Steve the best profit margins. He must ensure that he maintains the profit margins he has at present, and for all future products to set a specific margin for them. When Steve introduces an organic foods product line, he is planning on setting a profit margin of 12%, which will still allow for additional expenses of promoting the new line and leave a nice net profit for him.

It is sometimes difficult to predict with any real certainty what your profit margins will be (especially for a new product), as some expenses can and will fluctuate. If you have historical data for your business, you should average out the costs over the period of time you have data for, and create a rough figure that is based on a realistic amount.

If you are starting your business from scratch, then this is more difficult. Obviously you want to charge a price for your service or product that will cover the costs of the product, your time, the fixed and variable costs of the business, and still leave a net profit at the end of it all.

The challenge comes from pricing your product so that it covers these expense categories, and still is at a level that your customer will accept and eventually buy from you.

Here’s the bottom line – be flexible. Your cost of goods will be easy to ascertain (from any invoices from your suppliers), and your fixed costs will also be easy to ascertain. These are your rent, set wages, bills, and so on. Variable costs are those things that occur due to seasonal activity (i.e. more staff, etc), or unforeseen expenses. Allow for these unexpected expenses in your margin, but within reason. There will be times when your expenses will almost eat away your entire profit, and there will be other times when you will have more than your expected net profit in the bank at the end of the month.

You will need to start somewhere. Once you have set your price, you need to manage it and monitor the results. If customers are responding very favorably, and your competition is priced much higher, you could possibly raise the price a little. If you have slow sales, and the competition is closely priced, you may need to drop the price. If that means that your resulting net profit is too low, then some of your expenses may need to be looked at as well. It will take some time before you have established a set price for a product line, and are confident in your results delivering the return you would like.

Despite Steve’s historical data, which helped him know an average amount for his expenses, he adopted a formula approach. This approach helped him to quickly generate a dollar figure which he then assessed according to his customer’s buyer behavior, and against his competitors’ price position.

Steve’s formula was:

  • COG + Fixed costs + Variable Costs + Min NP = minimum price
  • COG + Fixed costs + Variable Costs + Max NP = maximum price

* COG = Cost of Goods
* Fixed costs = 30% of COG
* Variable Costs = 13% of COG
* Min NP = 6% of COG
* Max NP = 15% of COG

Another issue to consider is whether you will price yourself against your competitors. Will you be cheaper than they are, regardless of your margins? Keep in mind that this will develop an image in your customer’s mind of your business. If you can afford to be cheaper than your competitors all the time while still maintaining a healthy profit margin, than that might be a strategy to consider.

Steve’s approach was to price his products according to his own formula, and to develop his brand of quality and service. Ultimately this is the best approach to building a lasting business.

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