Having a product or service in place and seeing your sales grow doesn’t necessarily mean you’re making a profit.
One of the biggest mistakes small and mid-sized businesses make is pricing their products and services based only on competitors’ strategies or their clients’ purchasing power.
Maintaining solid financial health is a challenge for many companies. This is understandable, considering the wide range of external pressures businesses face today — from macroeconomic factors and cultural influences to supply chain disruptions, wars, and competition.
However, companies must also look inward and identify opportunities to improve their financial results by optimizing internal processes — especially their pricing structure.
Here are five key steps to ensure your products and services are priced profitably:
1. Calculate your Cost of Goods or Services Sold (COGS)
These are the direct expenses involved in producing a product or delivering a service. They include raw materials, duties, freight or shipping, labor, amortization, and manufacturing or facility overheads.
2. Determine your Tax Rate
The tax rate is the percentage imposed by the government on sales or purchases. It varies depending on where the transaction occurs and where the business is registered. (For more details, see Sales Tax Rates by Province.)
3. Determine your Commission Rate
This is the percentage paid to salespeople or affiliates to help increase sales and revenue. Usually, the commission rate is applied to the product or service price before taxes.
4. Calculate your Fixed Costs
Fixed costs are expenses that remain constant regardless of production or sales volume. They support the company’s overall operations and are not tied directly to production.
Examples include rent, property maintenance, utilities, property taxes, and salaries of non-manufacturing staff.
5. Define your Markup or Profit Margin
The markup represents the percentage added to your COGS to cover indirect fixed costs and achieve your target profit. This ensures your business maintains a healthy gross margin and financial sustainability.
Every company is unique, with its own internal policies and management practices. However, when defining your pricing strategy, it’s equally important to consider external factors — such as market value, competitors’ pricing, and inflation — alongside your internal cost structure.
Developed by Anira Fernandes | Spring Management Academy Inc.
