When considering all the reasons you became an entrepreneur, you simply can’t get away from the fact that your primary aim was to make money. Making money, however, depends on being able to accurately calculate the correct price for your product or service on the open market.
Although this may seem simple, the reality is that markets are competitive and there is usually someone selling something similar, better or even cheaper than your offering, says Ravi Govender, Head of Small Enterprises at Standard Bank.
“Getting your pricing wrong could ruin a business. The good news is that there are steps to follow to correctly value products or services. It is important to note, however, that there is no guaranteed formula for success. The benefits and risks of many approaches to calculating value need to be considered and weighed up against each other.”
It is creating value that has occupied the finalists on the ‘Think Big – Building Business Champions’ TV series, as they approach the time when the overall winner of a R1 million cash injection into their business will be announced. Using the first prize to build additional capacity and business value will go a long way towards helping this business achieve greater things.
“Many small businesses face challenges when considering all the factors to be taken into account when calculating the correct price for their product,” says Mr. Govender.
Some key things to consider are:
- Adding more than just a percentage onto the product’s actual production cost. You also need to consider the cost of your time, use of staff’s expertise and other underlying costs. Making sure that the product costs remain competitive through this process is vital.
Using ‘cost-plus’ pricing means thinking about:
– Direct costs (e.g. the costs of raw materials and electricity).
- Indirect costs (e.g. transport and delivery costs).
- Fixed costs (e.g. rent).
- Constantly monitoring prices across the market. Being aware of what is happening in your industry will provide you with early clues so that you can accommodate changes quickly.
From a pricing perspective, you should:
– Raise your prices when competitors raise theirs. This usually indicates that the market can support a price rise. It could also be a sign that your competitors are aware of imminent supplier cost increases, and know about them before you do.
– If customers tell you that your product offers great value when compared to the rest of the market, it could mean that your prices are too low. Investigate this and raise your prices if possible.
– Raise prices slowly. You can gain a market advantage if costs rise and your competitors compensate with a single significant rise in prices. Raising prices a bit at a time will keep customers loyal and grow your market share.
- Select your distribution channels carefully. Distribution costs, especially in an environment of fluctuating fuel prices, can present a real challenge. Monitoring alternatives, and managing timing of shipments so that volumes are maximised, is essential to preserving the value of your products.
- Researching competitive offerings to find out what they cost, the size and composition of the market, as well as the size of the buying base. Competing for market share means understanding what is on offer, what the strengths and weaknesses of competitors are, and what differentiates your product.
It is also important that the market is large enough to accommodate another competitor. It is not ideal to have to fight for market share against an established competitor. The fight will come down to pricing, and an established competitor could have the strength to cut costs and reduce profits – something you may not be able to counter.
“Although the above factors apply across most business sectors, the task of allocating a price to products is made easier if your product or service is unique. Once you have established a market, you can introduce prices that are the most advantageous to your business.”
“Remaining competitive is the key to success. Supply quality products, great service and you will build lasting customer loyalty, even if your prices are slightly higher than others in the market,” says Mr. Govender.
Press release by Magna-Carta.