Several years ago, we acquired a new client, who had only been in business for approximately six months, but who was giddy with excitement over the success the company was having in acquiring new business.
One of the first things we did for the client was to determine where he should be pricing his product, based on his cost structure and projected sales volume.
Very quickly, it became apparent why he was achieving such “success”. Based on industry hearsay and experience, without taking the minimal time necessary to put pencil to paper, he was pricing his product such that he was not covering costs, much less returning a profit.
This is a mistake that I run into more often than one would expect, that is, small business clients who are pricing their product based on what they believe are industry rules of thumb, or pricing formulas used at a prior employer.
It is imperative that a business develop its product pricing based on its own cost structure. While at the end of the day, the maximum price for your product will be set at what the market will bear, the exercise of costing your product or service will usually be eye-opening in terms of your true overhead costs, will give you valuable insight into those key cost areas that will need to be managed and controlled in order to achieve success, and
will give you the knowledge to confidently make business pricing and cost/spend decisions based on the effect it will have on your bottom line.