Setting Prices To Stay In Business!

The key to success in any business is profit. It’s pretty simple: If you don't make a profit, you won't be able to stay in business. Like a game of chess, it’s pretty simple on the surface, but there's a lot of strategy behind it. Many small, medium and large businesses fail every year because they fail to get to where the price is right. The basic premise is to make more than you spend. The trick in setting prices is to know how much you have to earn to surpass what you spend. Like the game show, your customers are yelling for you to “come on down” in your price. Can you really afford to do it? The cost of your product is just one part of it. You also have to factor in overhead items like rent, electricity, telephones, shipping charges, your vehicle and maintenance costs, employees (including yourself), and of course your most valuable asset –your time.

To earn substantial profits, setting prices correctly is crucial. Your prices have to be HIGH enough to cover your costs of doing business and earn a reasonable return, but LOW enough to remain attractive to your prospective customers.

Some dealers, take the approach that they can work cheaply because they are fast and ready to take any work, even for a small return. The attitude seems to be that any work is better than no work. The downside is that this approach sticks with you and can create a "cheap" image in your potential customers' minds that is hard to shake. Stay with this approach and you may just price yourself right out of business.

Other dealers, though, takes the approach right from the start that they are worth more. These dealers are able to receive a fair price for the products and value they provide. The start may be slower, but success and longevity are far more likely. With the bar set a little higher to begin with, these dealers are building a stronger foundation.

BASIC PRINCIPLES OF
GETTING THE PRICE RIGHT

Here are some basic principles to keep in mind when considering your pricing strategies:

1. If the price is right, it will substantially exceed costs and expenses

If you’re running a business you must cover your costs and then some. If you’re not doing this, then what you have is a hobby instead of a business.

2. When you have to lower prices, cut your cost, NOT profit.

It's obviously better and actually relatively easy to reduce your cost instead of your profit. At first glance, you may not think you have a lot of control over this, but you do. It's built in to the selection of Hunter Douglas products. If your customer is seeking a better price on Silhouette window shadings, for example, you can reduce cost by taking them to the Nantucket product line. You can sell a similar product at a lower price but still maintain your profits. Staying within the prestigious Hunter Douglas brand, this can be accomplished in virtually every window covering category from Designer Blinds.

To be successful with this approach, you must start at the top. It’s easy to move your potential customers to a lower price, but it may not be possible to move them to a higher price.

3. Prices must be appropriate to the market

If there is an extreme difference in price between you and a competitor, there must also be a significant difference in the product. It isn’t always clear to the consumer what the difference is, so you must be able to help pinpoint it. Is it the brand? The size? You may have to ask yourself if your prices are set appropriately to current market conditions. Download this free Pricing Questionnaire to help determine prices for your situation. Any price, whether yours or your competitors', must reflect the dynamics of cost, the principles of supply and demand, market changes, competition, product utility, brand, expected product life, warranties maintenance and end use.

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4. Prices must be within reach for your customers .

You may be selling the best mousetrap ever, but if your price is more than your potential customers are prepared to pay for it, it won’t sell. On the other hand, there is absolutely no reason to charge less than customers are prepared to pay either.

These expectations are set as the customer enters the market and you have a great deal of influence over it. Normally, several years have passed since your customers last purchased window coverings. If you introduce them to today’s market at a Silhouette price, they may initially be a bit taken aback. Give them the chance to fully appreciate everything that Silhouette shadings will do for them and price objections may evaporate. At least you'll be able to move them to Nantucket shadings, or a Duette honeycomb shade. By introducing them to the market at a high level, you set the stage for them to make their purchase at a much higher level than they would have otherwise. Better still, it keeps the sale contained within more profitable product lines.

5. Set Your Prices For You— Not just to beat competitors.

You can look at all the formulas you want, but to state it as simply as possible, you need to set prices as high as you while still able to move your products and services at a reasonable pace. Setting prices simply to beat your competitors’ price isn’t enough. Remember that you may have competitive advantages that allow you to set prices higher than your competitor. You have to be aware of your competitors, but you don’t necessarily have to let them change your behavior.

6. Earn a fair return for your time, talent, risk and investment

There is no reason to be shy about obtaining a just reward for what you do. Your expertise and talent has objective worth. Don't just give it away. Charge for it.

If in doubt, set your price high rather than low. It is much easier to discount or reduce your pricing structure than it ever will be increase it.

A DISCIPLINED PRICING STRATEGY

With careful analysis and a disciplined approach to setting your prices, you should be able to arrive at reasonable price points. After you do, it's important to continuously keep an eye on demand in response to any changes you make. Remember that your prices operate within a constantly changing environment and you need to be on your guard to ensure that your prices remain at the level that will do you the most good.

Part Two: Doing The Numbers:

SETTING YOUR PRICES BY PROFIT MARGIN AND SETTING APPROPRIATE MARKUP

The Profit Margin is the percentage of each sale that is pure profit. Setting your price by calculating the margins you need will help you to stay profitable. First, let’s look at the math behind it and then we’ll look at some easier ways. One of them is actually FREE!

Your gross profit is figured simply by subtracting your cost from your selling price.

Selling Price – Cost = Gross Profit

The next step is to figure your gross profit margin. To calculate the margin, divide the gross profit by the selling price.

Gross ProfitSelling Price = Gross Profit Margin

So, for an easy example, if I, as a dealer, sell pencils for $1 each (Selling Price), and I pay $.50 for each (Cost), then my Profit Margin for each sale is 50%. Since you probably don’t sell pencils with such easy numbers, let’s look at it more realistically. If you pay $250 (Cost) for a blind and sell it for $416.67 (Selling Price), your gross profit is $166.67 and your gross profit margin is 40%.

Gross profit margin is often confused with markup. Don’t make this mistake. It could put you out of business. Margin and markup are related, but more as cousins — definitely not twins. If , in the example above, the gross profit margin number is treated as a 40% markup, I would end up selling this product for $350 (instead of $416.67) and my actual margin would be down to 28½%. To set your markup to achieve the margin you want to make, use this formula:

(Selling Price – Cost)Cost = Markup Percentage

So, in this case, the selling price ($416.67) minus the cost ($250) equals $166.67. Divided this by the cost ($250) gives you the markup factor of .66668. To convert this into a markup factor, though, you must include the actual cost by placing a 1 in front of the decimal point, resulting in a markup factor of 1.66668. Apply the markup factor to the cost:

Cost x Markup Factor = Selling Price

So the cost of $250 is multiplied by the retail factor of 1.66668 to reveal the selling price of $416.67, at the 40% margin.

THERE’S GOT TO BE AN EASIER WAY – RIGHT?

If you have a hard time dealing with all these numbers, you’re probably thinking, “There must be an easier way.” Right? Here's a tool to help you:

FREE Gross Profit Margin Calculator.
Download this nifty little Gross Profit Margin Calculator for FREE.

This calculator will figure your margins automatically and add in taxes, too. This example shows the numbers we used above and figures those formulas for you automatically in about one second. In the COGS (Cost Of Goods) line, enter your cost. Then enter your desired Profit Margin. Your selling price is calculated automatically. Or if you want to use it to see what the margin is, enter your cost and your resale price. The margin will be adjusted automatically. You can use it to price a new sale or evaluate your records. It will even add tax if you want. You’ll find it to be a great tool in making sure the price is right!