For many small businesses, survival depends increasingly on finding the ever-elusive “right price” for whatever goods or services are being sold. But there’s no magic formula. No matter what you’re selling, the “right” price to ask is never clearly defined.
For one thing, costs differ from business to business. Online businesses, for example, don’t have the overhead of staffing retail stores and often aren’t subject to the same sales taxes. So an online store can sell at a lower price and still make a profit.
Chip Averwater, a third-generation retailer and chairman of Amro Music Stores in Memphis, Tenn., has seen it all and has developed a list of tried-and-true pricing advice for other business owners. Here are Averwater’s tips:
• Know the difference between wholesale cost and cost of the sale. Wholesale is the cost of the merchandise, not the cost of the sale. Think about it: The price paid to the manufacturer is only the first of many expenses in a transaction. Sales can’t be made without including expenses for rent, salaries, advertising, utilities, freight, maintenance, taxes and others. Just because a sale has a gross margin doesn’t mean it’s profitable.
• All sales should bear operating expenses. Some business owners subscribe to the theory that since expenses are fixed, so they should accept every sale that has a positive gross margin. But here’s the problem: When are expenses ever really fixed? Sales don’t happen in a vacuum. Boosting sales requires increases in personnel, space, inventory, handling, and virtually every other business expense.
• Practice your pricing math daily. Turns out your math teachers were right. You do need this skill to survive in the real world. You need a clear idea of the cost of every sale, service, and activity your business engages in. That information helps you decide what to stock, what to promote, where to channel your investments and efforts, and of course, set prices.
• Don’t try to offer the lowest price. You’ve probably seen it before: Weaker competitors offer lower prices to attract more customers. At first glance, this might not seem like a bad strategy. But those companies are crossing their fingers and hoping that when the dust settles, there will be a little profit left over.
• Reputations are made on price-sensitive items, margins on the rest. Price-sensitive items are the ones bought frequently and advertised often. In a grocery store, they’d include bread, milk and soft drinks. Because customers buy them often, price differences between stores are more apparent. •