For any new business starting out, setting a pricing structure can be tricky. Setting your prices high will, of course, give the best profit margins on each transaction, but the transactions may be few and far between! Setting them low can bring customers swarming to your door, but narrow profit margins can mean that even the busiest business will fail.
Taking a look at your direct competition is one of the first things you need to do. Price is a huge issue for customers and companies in these tough financial times, with everyone looking for the best bargain. Set your prices higher than that of a direct, comparable competitor and you’re giving your customer no incentive to shop with you instead of the cheaper alternative.
However, setting your prices too low can be just as detrimental. While you may need a ‘carrot’ to tempt customers to your business, especially if you’re a new business working with a limited target market, this doesn’t always have to be an issue of price. If you can, look at setting your prices inline with competitors, but find another way to add value for customers. Perhaps you offer exceptional service, guarantees, an exclusive range, a no quibble returns policy or some other incentive that makes it worth their while to deal with you as opposed to someone else.
When it comes to finding that ‘magic number’ with your pricing, it’s important that you’re realistic about your profit margins. This means being aware of all the hidden costs of running a business – and possibly having strategies in place to keep these costs low. The following are common business expenses and costs that need to be incorporated into your charges in order to turn a profit:
Insurances
Having the right insurances in place will protect your business from potentially disastrous accident, injury or damage claims. You can get business insurance from Hiscox to suit your needs. Search business insurance products by industry to make sure that you’re purchasing the right products.
Tax
Make sure that you’re prepared when the tax bill lands on your mat by automatically saving 20% of your profits in a separate savings account.
VAT
Once a business reaches the threshold of £79,000 annual turnover it must register to pay VAT. This means that the tax man will take an additional chunk of 20% of your profits. If you’re a B2B company then this is usually of no consequence as your clients can pay and claim the VAT back. However, if you deal directly with customers you will need to consider VAT when working out your pricing.
Wages
Having the right people on board is crucial for a business to thrive, but having to pay weekly or monthly wages can be a killer for cash flow. Employing self-employed freelancers can be a good solution, as you can negotiate longer payment terms and don’t have the added worry and expense of meeting their tax obligations.
Admin Costs
While it can be tempting to try to save money by doing everything yourself in the early days of a business, this can be a false economy. Consider whether paying an accountant is worth the peace of mind (and the advice on tax saving) and whether, for example, paying a cleaner or an admin assistant would make more economic sense than spending the time you should be working cleaning an office/chasing invoices etc.
Calculating your profit is far more complicated than just deducting the cost of an item or service to you from the amount that you charge for it. There are many different business expenses that need to be covered by your profits, so make sure that your pricing structure is set correctly from the start.