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Five pricing strategies to help make a profit

Getting your pricing right when you’re starting out is never easy. Here are five ways to help you improve your chances of making a profit.

3 minute read

As a new business it can be tricky deciding where to price (low, middle, high) without direct customer feedback or the evidence of buying behaviour. To help maximize profitable sales from day one, here are five pricing and costing strategies for you to consider:

1. Be sure everything has a net margin

 It’s easy enough to calculate what something costs you 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 10,000 units of a product with a $50 margin ($500,000 gross profit)
• the product has a dedicated salesperson, allocated floor space and direct overheads
• actual costs are $600,000 per year.

It looks like you’re clearing a decent gross margin, but in fact if you add up all the costs, you’re losing money with your net margin. It can be similar for services, where the costs of people and infrastructure doesn’t match the return you receive.

To help avoid this happening, you could allocate direct and variable costs to every single thing you sell (accepting some estimates will be needed) to triple check you don’t have anything that’s making a loss.

2. Charge what you are worth

You don’t always need to charge the accepted going rate if you think you could charge more. But sometimes it’s okay to under-price to generate initial sales, or help gain some initial market share from competitors.

However, many small businesses tend to under charge when first starting (or at the least, match others) when they don’t need to. You could stick to how you want to position and then convince your customers you’re worth every dollar. It’s also usually easier to re-evaluate your price after launch and come down, then go up.

3. Don’t discount

It’s tempting to offer discounts when you’re first reaching for customers (or even worse, family and friends). But keep in mind your bottom line could suffer.

Discounts could be a good option if you:

• want to create awareness when launching
• run short-term promotions to gain new customers
• want to clear old stock
• have bought product at a discount yourself and can pass on the saving.

If you do want to discount, another way to approach it could be to keep the price steady (and your margin) and add in free product and services as the ‘discount’, not the price.

4. Focus on higher margins

Another strategy is to concentrate on promoting and selling the products and services that have the largest margins (and in reverse phase out anything with a low margin). It should be relatively easy to list your top margin products once you’ve started, and triple-check these are the ones you and your staff try and sell the most.

With high margin products you could look at:

• devoting extra shelf or online space
• training staff which products have the best margins
• giving staff incentives or bonuses to selectively sell
• bundling with lower margin products or loss leaders
• spending more budget to promote.

5. Lower your costs

Reducing what you pay for raw materials, inventory or any component of what you sell can of course improve your margin. Identify your top five supplier expenses and determine if you could:

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

As a new business it’s still possible to confirm any supplier agreements before you start, especially if some time has lapsed from when you received a quote and when you commence trading. At the least, you could make a note to review all your suppliers after the first year of trading to identify what could be re-negotiated.

Once you’re under way, you could identify any efficiencies and ways to speed up what you’re doing. For example:

• minimise waste from production
• introduce lean production techniques
• reduce theft and fraud
• tighten slippage from products being broken or returned.

If you can, you might consider incentivising staff to find ways to reduce costs.  

Once you’ve launched, it’s a great idea to regularly review your pricing and costing so your business delivers the profit you deserve, and customers get the value they want.

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The information in this article is provided for general purposes only, and is a summary based on selective information which may not be complete for your purpose.  It does not constitute, and is not intended as, personalised financial, legal or tax advice. BNZ recommends that you seek advice specific to your personal financial, legal or tax situation from a qualified adviser. No representation or warranty is made as to the accuracy, reliability or completeness of any statement made in this article. Neither BNZ nor any person involved in the content 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.