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Balancing pricing, costs, and margin to improve profit

After launching your business, it’s useful to review your profit performance. Here are five pricing and costing strategies that could help you maximise your profit after starting up.

3 minute read

When you’re starting your business, it isn’t always about finding new markets or building sales. It could be improving the net profit margin within your business (especially if it’s temporarily difficult to find new customers).

The easiest solution to increase any businesses profit is usually to increase your prices. Profit should grow overnight, but there’s often more to it than that. There are risks involved such as:

• demand could fall if customers think you’re too expensive
• it could open a gap for competitors to tempt customers away
• it may not solve wider business issues (poor product, service, or delivery).

If the price elasticity of what you sell is low (if a price increase doesn’t affect demand much), it’s possible customers may accept a price rise without any undue stress. A twenty-cent increase in a cup of coffee could go unnoticed.

However, getting your pricing right is a balancing act between offering value for money to customers while charging as much as you can. Take a look at these five profit strategies:

1. Be absolutely sure everything has a net margin

It’s easy enough to calculate what something costs and then add a margin. But often there are hidden costs which, if added to the end result, could be costing you money.

A good example: you’re selling 1,000 units of product A with a $100 margin (bringing in $100,000 gross margin), but you have a dedicated salesperson, office and, floor space that costs $150,000/year.

Initially it looks like you’re clearing a decent margin, but in fact you’re losing money with a net margin of minus $50,000 once you consider those associated costs. Triple check all your products and services are making you money.

2. Charge what the market will handle

You don’t need to charge the accepted going rate if you think the market either won’t accept it (your price is too high), or you could charge more (your price is too low). Extra consideration needs to be given when underpricing (maybe to generate start-up sales or you feel the need to be cheaper to compete) or overpricing (charging a premium but you fail to communicate your benefits and struggle to gain customers).

As a strategy, it’s useful to continually monitor your pricing to make sure you have the right balance so you’re not only charging a fair price, but also making a profit which keeps your business growing.

3. Be careful when discounting

It’s really tempting to offer discounts to customers, especially when you’re just starting and are under pressure to make a sale. You feel good, the customer feels good, everyone wins. Except your bottom line suffers if the discounting is not part of an overall strategy (for example to drive volume sales or part of a positioning strategy against competitors).

You might consider discounting if you’re:

• running short-term promotions to gain new customers
• wanting to clear old stock
• using a product or service as a loss leader (to on-sell a more expensive item)
• buying product at a discount yourself and can pass on the saving (temporarily).

If you do want to discount, consider keeping the price of the product the same but add in free products or services at full price as the ‘discount’ to trade on your margin (so a product costing you $50 is given away at the marked-up retail price).

4. Focus on higher margins

Another option, if you can, is to concentrate on promoting and selling items that have the largest margin (and in reverse phase out anything that’s low margin). Even if you’re a business that trades on slim margins and high volume, list your top margin products and triple-check these are the ones you and your staff try and sell the most.

With your high margin products you could consider:

• devoting extra shelf or online space
• training staff what to sell
• giving staff incentives or bonuses to sell selectively
• bundling them with lower margin products or loss leaders
• spending more promotion budget.

Selling items with a better margin may increase your profit without needing to increase your sales volume. 

5. Lower your costs

Reducing what you pay for raw materials, inventory, or any component of what you sell may improve your margin. It’s important to review costs after you’ve launched as sometimes in the buzz of starting it’s easy to pay more than you need to. Identify your top five supplier expenses and determine if you could:

• negotiate lower prices while maintaining the quality
• review your terms of trade
• take advantage of discounts through buying in bulk
• receive a discount for early payment.

Another way of lowering direct costs is by identifying efficiencies and ways to speed up what you’re doing, such as:

• minimise waste from production (like using excess materials)
• introduce lean production techniques
• reduce theft and fraud
• tidy up issues from products being broken or returned.

It may be helpful to find incentives for staff to reduce costs. They are often directly involved in the operations of the business and should know what to do to make savings.

You could look to combine all five of these strategies after start-up to help improve your overall business. Then review them on a regular basis to help your prices deliver the profit you deserve and give customers the value they want.

This article is solely for information purposes and is not intended to be financial advice.  If you need help, please contact BNZ or your financial adviser. Neither BNZ nor any person involved in this article accepts any liability for any direct or indirect loss or damage arising out of the use of, or reliance on, all or any part of the content.