Pricing Fundamentals for Small Business.
The fundamentals of pricing your products or services to operate a profitable small business, with your host Henry Lopez.
How do you price your product or service to find that balance between what your target market will pay and what you need to charge to make a profit?
On this episode of The How of Business podcast for small business owners, Henry Lopez shares his approach to pricing and what he has learned from other experts about pricing for small business products and services.
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- Pricing Fundamentals for Small Business Owners
“Pricing Fundamentals for Small Business” offers a comprehensive guide to pricing strategies tailored for small business owners. It covers the distinction between Pricing Markup and Gross Profit, outlines a step-by-step process for calculating Price Markup, and provides benchmarks for Wholesale Pricing Markups. The document also addresses common pricing mistakes, offering solutions and related resources for optimal pricing strategies. Key topics include the importance of understanding the market, adjusting pricing based on research and analysis, and the critical role of regular price reviews for business sustainability and continued profitability. Additionally, it emphasizes the need for a balance between overpricing and underpricing and the significance of considering costs, market feedback, and competitor pricing in developing a successful pricing strategy. - Priceless BizNotes
Pricing Fundamentals for Small Business: On this episode Henry shares…
- An introduction to pricing strategies for small business owners.
- What is Pricing Markup and how it’s deferent from Gross Profit.
- How to determine Price Markup.
- Step-by-step process to calculate your Price Markup.
- Wholesale Pricing, Markup Benchmarks, Sales & Discounts, and related Resources.
- Common Pricing Mistakes.
Pricing Strategies for Small Business:
- Determining the selling price of your products or services requires a combination of research, analysis, and market validation.
- Ultimately, the market determines the ideal price for your offering. This is one of the many reasons the MVP (Minimally Viable Product) approach is so effective.
- If you are already selling your product or service, then analyzing and adjusting pricing regularly (at least annually) is critical to the sustainability of your small business.
Pricing Markup vs. Gross Profit:
- Pricing Markup is not the same as Gross Profit, and understanding the difference can help you strategically price your product or service profitably.
- Pricing Markup is the amount by which the Cost of Goods Sold (COGS) is increased to set the selling price.
- Gross Profit refers to the selling price minus the Cost of Goods Sold (COGS).
Pricing Markup Calculation – 6 Steps:
- Calculate Indirect Expenses (Overhead).
- Calculate Cost of Goods Sold (COGS) or Cost of Sales.
- Set Target Selling Price.
- Calculate Break-Even Point.
- Break-Even Point: when revenue covers all indirect (other than COGS) expenses and have a profit of $0. (Formula: (Break-Even Point = Indirect Costs / Gross Margin))
- Determine Markup.
- Goal: Ensure the business makes a high enough gross profit to be able to pay for its indirect fixed costs while also earning a profit.
- Determine target number of units you expect to source and sell (consider sourcing and production capacity).
- Determine average Cost of Goods Sold per unit.
- Calculate projected Operating Profit (EBITDA).
- Adjust Selling Price:
- Consider production capacity and break-even.
- Adjust Selling Price as needed depending on your market.
- A cost-plus pricing strategy, or markup pricing strategy, is a simple pricing method focusing on internal factors, and does not consider external factors like consumer demand and competitor prices.
- Apply pricing techniques like Charm Pricing and Anchoring.
- Refer to Markup Benchmarks in Pricing Strategies Download.
Wholesale Pricing Strategy:
- Multiply your Cost of Goods by two (Keystone Pricing), to ensure your wholesale gross profit margin is at least 50%.
- Apparel retail brands typically aim for a 30-50% markup, while direct-to-consumer retailers aim for a 55-65% markup.
- The Retailer should then be able to price your product such that they can make a profit (double the wholesale price typically at a minimum).
The questions to ask yourself as you set the price for your product or service should include:
- How much do I need to sell, and at what price, to break even?
- Is the Selling Price realistic for my target market?
- What is my production or sourcing capacity?
Episode Host: Henry Lopez is a serial entrepreneur, small business coach, and the host of this episode of The How of Business podcast show – dedicated to helping you start, run and grow your small business.
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