June 2005

ABCs of Accounting: Women Pricing Product

As small business owners, we face a number of challenges or, as the more positive among us would say, we face a number of opportunities. One of the most important issues in the success of our business is pricing our product or service properly. It requires a delicate balance between meeting the needs of our customers and keeping our business on track. We must be able to recover our costs. We must be able to make a profit so that we can reinvest and grow our companies. We must make a decent return on the investment of our time and money. And we must retain and increase our market share.

How do we do this? First, if you are a retailer, the general guideline used by many businesses is to double the wholesale cost of the product. Some retailers, such as jewelers, mark-up their products a great deal more than 100%. If you are a retailer then this method of establishing your price may give you a good start. However, you must always be concerned about seasonal mark-downs and inventory loss. Watch your monthly financials to make sure that your pricing accomplishes your goals.

Second, if you provide a service, there are alternatives to consider. If your service is routinely offered to many customers, for example hair dressers, nail technicians, or dry cleaners, established prices per procedure is the norm. You can estimate your costs and then add an amount for the time spent on the service. You can also estimate the cost of doing business for a day or a week with the volume that you expect and calculate an estimated per item cost. You can also charge the going market rate in your locale. Most of us will use a little of each process and intuitively establish a rate that “feels right”. Not too scientific but then business is as much art as science. No matter which of these processes you follow, it will require frequent monitoring.

Third, if you offer a specialized service, such as legal counsel, accounting, or private nursing, your pricing will probably be based on an hourly rate. This rate will vary depending on the particular expertise that you offer and whether you are retained for a specific responsibility or for recurring responsibilities. If your client retains your services on a monthly or weekly basis, a set price may replace the hourly costs. In each of the professions mentioned above, experience will be the guide for setting your rates. Once again, you should monitor the revenue received to be sure that the objectives mentioned earlier are met.

In all of these situations, the revenue produced is only a part of the equation. If the prices are set to meet the competition and there is still little or no profit, the other side of the equation must be examined. Are we adequately controlling costs? Are there efficiencies that can be gained by purchasing different quantities or by being a regular customer of our wholesaler and obtaining discounts? Can we add additional value without incurring additional costs and possibly be able to increase our prices or be able to gain customer loyalty?

Pricing our product or service properly is a delicate balancing act: a balancing act that may spell success or failure. May you all become talented tight-rope walkers in the world of business.