Firstly you need to review the factors that will define your pricing policy and determine your initial prices for the products and services you provide as a basis for further calculations.
You need to set about evaluating the prices your charge for your product or service? The basis of the prices can be as follows:-
- What it will cost to produce the goods or provide the services.
- What your competitors are charging.
- What the market will stand.
Cost v Price at first sight looks straight forward.In practice it isn’t because the cost of your goods or services depend on how much you actually sell. There are a number of costs that you incur however many sales you make and sell up to a certain level.
For example if you are running a book shop , you must pay rent and rates, heating, lighting, basic wages, interest on loans, insurance, bank charges and so on. If you have capital equipment you must also take into consideration the amount of depreciation. All these costs are classed as ‘fixed’ as it doesn’t matter how many books you sell , even if it is only one book, you still have to pay all of these costs.
Each book you buy has a cost, when you sell it to a customer the difference between the cost and the sale is the ‘gross profit’. The more books you sell the more costs you incur and therefore these are ‘variable costs’.
Every business will have fixed and variable costs, however dependant on the product or service these will be different.
To make the business successful you will need to sell enough books and make enough revenue to pay the ‘fixed’ costs before you make any profit.
For example if your fixed costs are £5,000 per annum- from the books you sell you need to make £5,000 profit.
If each book sells for £30 and you purchase for £10 you will need to sell 250 books at this value just to break even.
To make a profit you will have to either:-
- Buy your books cheaper
- Sell the books for a higher value
- Sell more books
For example if you sell the books for £35 and buy them for £8 you will only have to sell 185 to break even, however if you sell the 250 you will have made £1,750 profit.
If you want to make the same amount of profit with the same costs and revenue you will have to make 337 sales.
These examples highlight how by making changes in certain areas can affect the business.