Having a product or service in place and seeing your sales growth does not mean that you are making a profit.
One of the biggest mistakes many small and mid-sized businesses and entrepreneurs have is pricing their goods and services based only on their competitors’ price strategy or their clients’ affordability.
It is a challenge for many companies to maintain their businesses running with consolidated financial health. It is understandable based on the vast range of aspects that put pressure on how companies position themselves in the market today. Some of those aspects are macroeconomic, cultural, lack of business management knowledge, supply chain disruptions, wars, competitors etc…
However, companies must look inside their operations and visualize opportunities to improve their financial results by streamlining their internal processes, in this case, their pricing processes.
1. Calculate your Cost of Goods/Services Sold
Cost of Goods/Services Sold are the expenses incurred in the product or service production. The cost of goods/services sold includes the cost of raw materials or product costs, including duty, freight, or shipping charges, cost of labour, amortization expenses, and manufacturing/facility overhead.
2️. Tax Rate
Tax Rate is the percentage at which an individual or company is taxed by the government any time purchases or sales occur. It varies based on where the product was bought/sold and where the business was established. For more detail, please refer to the Sales Tax Rate by Province.
3. Determine your Commission Rate
Commission Rate is the percentage at which an individual or company pays salespeople or affiliates to help them to increase their sales and revenue. In general, the commission rate is applied to the price of your products/services before taxes.
4. Calculate your Fixed Costs
Fixed Costs are the costs that do not change based on the increase or decrease of sales or production volume. Fixed costs exist to support the company’s operations. They are not associated with goods and services production or delivery.
Examples of Fixed Costs are property rent, property maintenance, hydro, property taxes, and payroll expenses of employees who do not work in manufacturing etc…
5. Determine your markup or profit %
The markup is defined as a percentage of the Cost of Sales or Cost of Goods/Services Sold. The idea is to ensure that a company can pay for its indirect fixed costs while also earning a target profit by receiving a high enough gross or profit margin.
Each company is unique and managed with a range of internal policies that set them aside from its competitors. However, there are a few other steps you must consider other than just looking into your internal operations while determining your pricing strategy. In addition, you need to consider the market value of your product, look at what your competitors are charging, and look at inflation as a factor.
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