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Finance Accounting Your Pricing Policy and Profitability
Finance Accounting Your Pricing Policy and Profitability
| Your Pricing Policy and Profitability |
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| Written by Arman Sharpe |
| Wednesday, 10 December 2008 12:56 |
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Developing an effective pricing policy is a critical factor in maximizing your businesses profitability. Generating the greatest profit is not simply a result of selling goods at the highest profit margin. It is the result of many factors that are intertwined, namely: sales price, sales volume, cost of goods and overhead costs. These related factors ultimately determine the overall profitability of a business. Although increasing price may result in a decrease in sales volume, this approach may actually generate a greater total profit. If sales volume is too low, however it may decrease total profits. Alternatively, dropping prices may create a large enough increase in sales volume to generate greater total profits. Again, if volume is not increased enough a lower profit total may result. An important factor in any pricing decision is to know the actual cost of doing business and the cost of each product sold. Determining the actual cost of doing business necessitates careful, accurate analysis. Of course, no one would be expected to calculate the cost of doing business with complete accuracy. You just need a fairly close working number. Failing to accurately estimate the actual costs closely enough so that you can make sure your price is high enough to cover them is often the cause of a business failing. This is because many business owners underestimate the overall cost and without knowing it, they end up selling their products at a loss. Before setting the price on any of your products you must estimate the cost of labor, raw materials, variable overhead costs as well as research and development. As costs fluctuate over time you may need to re-evaluate these numbers to make sure they continue to be accurate. Regardless of the strategy that is used to maximize profitability, the method for costing products is basic. It involves four main categories: Direct Material Costs, Direct Labor Costs, Overhead Expenses and Profit Desired. Combining these factors allows you to calculate an item's minimum sales price. A detailed explanation of this method can be found at the resource listed below. Product cost, break even points and minimum acceptable profit estimates are only one element in creating a profitable business plan. After you have determined these numbers you will also need to decide on the most effective sales strategy. There are three main sales strategies that are common in business. By using one or all of these strategies you can develop a final pricing plan that will allow you to compete in your market most effectively. Determining a products price involves many considerations. Even though many businesses try to compete on price alone this is not the only option. Often a business can avoid price wars by finding a market niche that is not being served well enough or by offering a more effective solution. No matter which approach you take, however, it is essential that you recognize and fully analyze all of the costs involved in your product to determine it's pricing. About the Author: For a detailed explanation of how to develop your pricing approach including examples and the three main sales approaches most businesses use to develop the most profitable pricing strategy visit the Top Business Resources Site. Kindly provided by LJ-Marketing.dk You are welcome to use this article on your own website, if you include the link just before this text. |
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