Price Setting by James Huy Vuong

Written by James Huy Vuong, Founder of Your Accounting Partners: Price Setting

One of the most important elements of starting up your business is setting the price of your products and services. It is not an easy task and there are no fix rules to follow, however, there are some useful guidelines that may help you.
Cover costs

First of all, you have to ensure that the price of the product or service will cover your costs. Compute your fixed costs. These are expenses which you will need to pay regardless of your sales level. Fixed costs include payment for employees’ wages, rent, and utilities. After knowing your fixed costs, determine your variable costs. These are the costs of your purchases or the costs of rendering your services. The total amount of variable costs will vary or depend on the sales level of your business.

Approach

One of the methods in setting your price is cost-plus pricing. This is basically adding the markup on top of the price of your product or service as a percentage of its cost. This markup percentage which actually represents your profit can be identified by industry standards or by the owner himself. This way of setting the price is usually used as it is relatively easy to compute although it might be hard to dictate prices as customers like comparing prices. In addition, they generally purchase or avail of products or services which they think are the best deal for them.

On the other hand, value-based pricing would be more difficult to determine as it would require estimating prices depending on how much willing the customers would pay for your product or service. You would need to do some market research or have it on trial and error just to get a hold of this information.

Value-based pricing in its literal sense implies basing pricing on the product benefits perceived by the customer instead of on the actual costs incurred in producing and developing the product. Under this approach, non-price elements like convenience, quality, service, fashion, and trends, are given more attention to increase the perceived benefits of the customers, which will then be used in setting the price.

Mark-up and Margin

Markup is the amount added to create a profit, onto the total cost incurred by the producer of a good or service. Mark-up is the percentage of the cost price.

Mark-up = Gross Profit   x 100

     Cost

Margin represents the profit percentage of the selling price that the company retains after incurring the direct costs associated with producing the goods and services it sells.

Margin = Gross Profit   x 100

    Sales

For instance, a shirt costs $120. You sell it for $200. The mark-up is 67% and the margin is 40%. (In percentage figures, mark-up is always higher than the margin for the same product.)

Mark-up = ($200 – $120)   x 100    =          67 %

    $120

Margin = ($200 – $120)   x 100    =          40 %

    $200

ACTION ITEM

  • Compute your fixed and variable costs and then identify your desired profit margin. Decide what suitable pricing strategy you will use.

One of the most important business strategies that you need to decide is setting your price. Your sales and marketing plans and activities should give more attention on increasing profits rather than merely increasing sales.

 

About the Author

James Huy Vuong the Founder of Your Accounting Partners, a Brisbane based Business support agency. Specialising in providing bookkeeping, accounting, tax and compliance, business valuation and business sales services to local small business owners.

His passion for business was evident very early on at the start of his career in accounting. He embarked on an unconventional path away from the traditional position with one of the big 4 accounting firms like most aspiring young graduate in his field. He decided instead through the lure a more diverse role, more pay and a much cooler title to work with Australia largest telco as a Business Specialist. He entered the world of business management and ownership in the hospitality industry for the invaluable hands-on experience one could not get just by reading textbooks, understanding debits and credits and passing exams. Huy has also spent a good part of a decade in the financial services industry owning and managing his family business which has lead him to start Your Accounting Partners. Your Accounting Partners sets out to help time-poor, frustrated business owners do better business by partnering with business owners on their ownership journey and making it together. Your Accounting Partners specialises in hospitality, service-base & professional services businesses. His mission is to help business owners use their business to give back to the family what it takes out. When it comes to business we say “You focus on what you do best, partnering with us and we’ll take care of the rest”.

Email us at hello@youraccountingpartners.com.au or call 07 3668 0646 if you need assistance and support with your small business from start, scale thru to sale.

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