We all make pricing decisions, make pricing decisions every single day. . We all race up on every single thing, all lessons for that matter. Do we ever think that pricing is more for bland activity? Do you have a thumb rule for pricing or do you make a well informed decision?
We have some idea of costs, and some back of the envelope calculations, to which we add a percentage of profits. That is generally our thumb rule.
The next part is negotiating with customers. There too we tend to give a blanket discount – say about 15%, based on the price negotiations by the customer. The customer might ask you to match a particular price to bag the order.
We match the price, factoring in some profit margin – again based on calculations on the back of an envelope. This is a very casual method of pricing our products. There is a scientific, fool proof method of pricing products or services.
There are certain elements that you need to consider very critically. Whether you should consider all your costs, or only certain costs while pricing each product or service. Most of us try and cover all costs for every order that we get, and that is not necessary.
There are certain cost that are your direct costs, and those that are fixed costs. If you try and cover your fixed costs for every order, you would have difficulty in matching the competitor's price. You need to analyze which of your products are going to give you a decent amount of margin.
Use those products to cover your fixed price. What are those fixed costs? Fixed costs those which you have to incur irrespective whether of you run a manufacturing operation, such as electricity, telephone, Internet, salaries. All these costs fall under the category of fixed costs. To cover these, you have to be cautious.
But there are some costs that you have to cover, and those are direct costs, like material. Or if you get an order which is beyond your normal capacity, and if you need to hire additional labour, that needs to be covered too.
When these costs are clear, you will be able to arrive at what we call is no-nonsense price, or a rock-bottom price, with which you can take the order, and yet make some profit. If you take this systematic order, you will realise that you can let go of some price and yet grab the order. Just be clear about your own cost structure.
Let's decode the components of price in terms of your business
Material or resource:
Raw material, Consumables, packing material required for manufacturing the product. In case of service industry it is the resource. It can be a person and/or a machine that provides the service
Labour
Workers and supervisors required at the factory for manufacturing. They could be employed or on contract
Overheads -Direct or indirect
Direct overheads are those expenses which are directly affecting the production or rendering of service
Indirect overheads are those expenses which may not be necessarily incurred for production or rendering of service however, these are in the nature of general and administrative, marketing and so on
Overheads are also classified in to fixed and variable
Fixed overheads are those which have to be incurred irrespective of any sales or production. I.e even if there are no orders these expenses are to be met like salaries, wages, electricity, internet and so on
Variable expenses are incurred specifically for the manufacture of product or rendering of services and hence vary depending on the volume or type of product or service.
Once the costs are understood following points need a serious consideration:
So coming back to what I said in the right first video (click here to watch) is that accounts and finance does nothing but a translation of your business in financial built in money don'ts And I think all these videos we have seen how each and every business aspect of each and every business operation kind of interlocks the links with finance and cost.
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