Growing and sustaining sales is the goal of every business owner. There is nothing more gratifying than for an owner to experience success. One of the most challenging parts of business ownership is the pricing of your products or services. Determining your price should not be a guessing game; but rather an educated, well researched process.Small business owners often overlook understanding gross margin. This can have a direct impact on your ability to effectively manage a growing company, price your services, and most importantly, make a profit. Ignoring the financial health of your business is the first step down a slippery slope.
True confessions of a small business owner will reveal the need to generate any kind of revenue; profitable or not. This sad truth can also be the key contributor to business failure. Sell the value of your product or service first; then your pricing will be more accepting by your potential customers. Keep in mind the cheapest product or service is rarely the most widely used. Know your market and competition and then establish your pricing model from that point.
Understanding your gross margin is the first step in establishing your pricing model. But gross margin is much more than a percentage of your sales. Gross margin represents the percent of total sales revenue that the company retains after incurring the direct costs associated with producing the goods and services sold. The higher the percentage, the more your company retains on each dollar of sales to service its other costs and obligations. In short the gross margin determines your break even point and ultimately your profitability.
Understanding and monitoring gross margins can also help you avoid pricing problems, losing money on sales, and ultimately stay in business. If you don’t know what your gross margin is, then making sense of anomalies in your income statements becomes tricky.
Good Business Practices
Many companies can appear to be thriving but are often failing because their prices are too low or their costs are too high and they can’t make a profit. Establishing a low price strategy is tempting. However, it’s rarely sustainable and it can be tough to increase prices later, even with a loyal customer base. Using gross margin calculations and other factors as you plan your business can help you avoid pricing mistakes before it’s too late.
While all customers appreciate discounts of some kind; look at volume or shorter payment terms as a way to build customer loyalty and good will.