Tougher trading conditions and increasing costs are common concerns for many small businesses in today’s economic environment, but it doesn’t mean that you need to resign yourself to tighter margins and declining profits. What it does require is for those businesses to take a closer look at the fundamentals of their operations – inputs, outputs and pricing. In challenging times, reassessing and restructuring your pricing strategy is critical and could be the key to unlocking financial relief. If managed well, it can help to shore-up the business, enabling you to reap the rewards when conditions improve.
Price for profit.
Effective pricing is the only way businesses can recoup costs and build profits, so it literally pays to get it right. No matter what the state of the broader economy, considered and strategic pricing can have a positive impact on the stability and growth of any business. The key to a successful pricing strategy is to incorporate all the back-end costs of actually doing business, as well as a margin for profit that will be acceptable to the customer. Your customers are, of course, an essential consideration when setting a price, but it’s also important to remember that you can’t keep them happy to the detriment of your own profits. If your costs increase, then eventually – to some degree – you will need to pass them on to your customers. If you don’t, not only will your margins suffer, but so will your customers when you have to make inevitable cost-cutting changes across the business.
Count all the costs.
To ensure you don’t omit any core business costs when assessing pricing, take a bottom-up approach. Firstly, consider all major expenses such as inventory, rent and staff, as well as everyday expenses such as utility bills, fuel costs, marketing expenses and loan repayments. Being competitive or ‘out-pricing’ the competition is often top of mind when it comes to setting price. However, while competitors will help you gauge the market rate, their pricing structures should not be used as a blueprint for your business. No two businesses will have the same debts, staff costs or supplier arrangements and simply imitating or undercutting a competitor’s price will not account for your individual offer, service and customer base. Location is also an important consideration. For example, a business located in a prestigious area populated by young, single executives may be able to demand higher prices than a similar operation in a nearby family-oriented suburb.
Count on quality.
The next step is to determine what will be a reasonable profit margin for your product or service. This will be guided by its perceived quality or value and demand, as well as customer and market sensitivities. The margin should also provide a cushion for fluctuating expenses. Quality or value may be driven by intangible factors, but these are what enable you to charge a premium loading on price. So whether it you have a niche offering or you are available out-of-hours or you provide service to hard-to-reach communities, build this into your pricing structure.
Recognise a hero.
Effective pricing doesn’t only deliver profits, it also informs marketing decisions and sales efforts. By being aware of the profit margins, owners can identify a few high margin ‘hero’ products or services. By focusing extra marketing and sales resources on these few hero items, owners may be able to maximise high-profit opportunities and compensate for lower-margin offerings. All things considered, it is fair to say that pricing is one of the most important and influential components of the business. It requires careful consideration, calculation and planning, but when executed well can not only assist in successfully navigating the business through challenging times, but achieving high returns when the pressures ease.
Symon Brewis-Weston is Executive General Manager, Local Business Banking, Commonwealth Bank.