in Small Business
Issue No. 5 - April/June 2002
The Price is Right
by Max Baldock
There are several ways to grow the profitability of a business, including:
- Reducing the cost price of your goods
- Reducing or containing the costs of doing business.
- Selling more products without a price reduction
- Selling the right products at the right price.
One of the most important factors affecting the profitability of a business is setting the right price for goods sold to customers. Yet, it is often the one area of business that does not receive the scrutiny that it deserves. There are some basic steps that can be taken to ensure that the price is right for your saleable goods or services.
Benchmark percentage gross profit
From the previous year’s financial statement, determine the percentage gross profit of your business. Did it enable you to pay yourself an adequate wage for your labour?
Did it provide you an adequate return on your invested capital, or will this be achieved on the sale of your business? Did you amortise the costs of your business, such as depreciation of capital items and of goodwill? (refer to in—business 2, ‘Planning your escape from small business’)
If you answered ‘yes’ to all the above questions, congratulations! It is likely that your gross profit is sufficient to achieve your business objectives and hence the price is right!
If the answer was no to any of the above, how many extra dollars would have been required to turn your answer to yes?
Add these dollars (based on the full year) to your total yearly turnover. Call it your Desired Yearly Turnover.
Determine your new percentage gross profit by using the following formula:
Desired yearly turnover – cost of goods x 100
Desired yearly turnover.
You now have a benchmark percentage gross profit at which to aim.
Profile your products
List your products. These might be listed in categories or more detailed alongside each product. Then:
- Enter the average w...
