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Pricing Procedures for Retail

Pricing Procedures for Retail

PRICING PROCEDURES FOR RETAIL

When your company purchases and sells a product, the revenues derived from sales of the product will directly affect the success of your business. Though pricing strategy and computations can be complex, the basic rules of pricing are straightforward.

  1. Prices must cover all costs. See SCORE Brief 4.05, Profit and Loss (P&L) Statement.
  2. The most effective way to retain or improve the profit margin is to reduce fixed and variable costs, and adjust price as necessary.
  3. Prices may need to be increased or decreased to assure that they reflect changes of costs, market demand, and competition.
  4. Competitive prices must be established to assure sales. Benchmark pricing against your competitors, but price to sell. Pricing of some products may be lower than cost (known as a loss leader) to create demand for products that can be priced at the desired profit margin.
  5. Product utility, longevity, maintenance, and end use must be judged continually, and target prices adjusted accordingly.
  6. Prices must be set to preserve order in the marketplace. If you raise your prices because you want a higher profit or a bigger marketing budget, but the competition doesn’t follow suit, your price will not be consistent with the market.

THE RELATIONSHIP BETWEEN PRICES AND COST

Before you can set a price for your product you have to determine the costs of running your business. Revenue from the sale of your products and services must cover all of your expenses, no matter how or why they are incurred. If the prices you set for your products and services do not cover all your costs, you will have a negative cash flow and have to infuse cash into the business until your resources are depleted and your business fails. See SCORE Brief 4.09, Cash Flow Projections.

How much does it cost to run your business? You must add fixed costs (such as property/equipment leases, loan repayments, management cost, and depreciation) to the variable costs of raw material, inventory, utilities, and labor. See Score Brief 4.07, Balance Sheet.

You must also take into account other costs such as damaged goods and handling of returns, and desired profits to arrive at an initial price for your products and services. However, the most important aspect of cost versus price is that ultimately the market determines the price you may charge. Bottom line, successful pricing must be between your cost/breakeven point and the maximum price the market will allow. See SCORE Brief 4.13, Breakeven Sales.

PRICING METHODS:

COST PLUS PRICING: The key to cost-plus pricing is to ensure that the “plus” figure not only covers all overhead, but generates the percentage of profit required. It is usually used by manufacturers.

DEMAND PRICING: Where there is little or no competition and you price what the market will bear.

COMPETITIVE PRICING: Where there is substantial competition and you must meet the competitive price, unless you can provide added value (location, delivery, features, warranty, service, etc.).

MARK-UP PRICING: (See below). Many retailers and wholesalers use mark-up pricing. It consists of adding a certain amount to the costs of the product, which becomes the selling price to the consumer. This markup amount must cover all other expenses plus the desired profit. For example, if your price tag says $5000 and the cost of your product is $3000, your markup is $2000.

Markup represents a percentage of the seller’s product cost. It is expressed as follows:

(Total sales – Cost of sales) / Cost of sales = % Markup

$5,000 – $3,000 = $2,000 = .66 = 66 percent markup.
$3,000        $3,000

Pricing a product

To price products, you need to be familiar with pricing structures, especially the difference between margin, markup and break-even. As mentioned already, every product should be priced to cover its purchase costs, labor costs, packaging costs, freight charges (variable costs), and a proportionate share of overhead (fixed operating expenses), and a reasonable profit. Such factors as unpredictable insurance expense, theft, shifts in wholesale material costs, freight expenses, and sales or discounts will all affect final pricing.

Margin

Margin, also referred to as gross margin, is the difference between your total sales and the cost of sales (variable costs); it equals the fixed costs plus profit. It can be expressed as a percentage or a dollar amount. As a percentage, the GP margin is always stated as a percentage of net sales. It represents a percentage of the seller’s price.

(Total sales-Cost of sales) / Net sales = Gross profit margin.

$5,000-$3,000 = $2,000 = .4 = 40 percent
$5,000        $5,000

Break-even (Refer to SCORE Brief 4.13)

Break even analysis is a method that indicates when revenues equal total cost. Your break-even point represents the point at which you neither make nor lose money in producing your product. It is expressed as follows:

Breakeven sales = (Fixed cost x Unit selling price) (Unit selling price- Unit variable cost)

It is highly recommended that you get advice from your SCORE Mentor or go to the library, or search the Internet (Google “Pricing”) to get as much information as possible on pricing. Pricing is not easy and can be very confusing if you are not familiar with pricing concepts and structure.

Just remember, with any business that you start, the key to pricing is to find the price that (1) Customers are willing to pay, (2) is competitive in the marketplace, and (3) will produce the desired profit for your business.

Do not forget a very important rule: “Cash is King”.

If you would like to request a SCORE counselor, please click here.

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Start-up Costs of Going into Business

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Start-Up Costs of Going into Business

When starting a business, you need to plan for your initial costs and understand their taxation.

The following list includes typical amortizable start-up costs involved in starting a business.

  • Pre-Opening Salaries and Wages – including instructors/trainees
  • Prepaid Insurance Premiums – learn more at SCORE Business Brief 09.00
  • Inventory
  • Legal and Accounting Fees
  • Rent Deposits
  • Utility Deposits
  • Supplies
  • Advertising and Promotions – brochures, business cards, flyers, newspaper ads, etc.
  • Licenses – permits – inspections – learn more at SCORE Business Brief 10.03
  • Market Surveys – to identify number and location of potential customers or distributors
  • Site Surveys – to locate a place of business
  • Supplier/Labor Market Analysis – to assess cost and supply of local suppliers/workers
  • Travel & Living Expenses: to secure suppliers, distributors or customers.

Note: Start-up costs do not include product/service research and development, interest on loans, or taxes

To be amortizable, a start-up cost must be a cost that would be deductible if it were paid to operate an existing business (in the same field as the one you entered into), and it must be paid or incurred before the day your active trade or business begins

Start-up costs of up to $5,000 are deductible as “other expense” in the first year of operation, while the balance of those costs are deductible over the next 15 years. If the first year’s costs exceed $50,000, that year’s deduction is reduced.

Organization costs up to $5,000, such as the legal fees and state registration fees required to set- up an LLC, partnership, or corporation, are deductible in the same manner as start-up costs.

Capital expenditures for vehicles, leasehold improvements, equipment, and buildings must be depreciated for tax purposes over their useful life (see IRS Pub. #946). However, under Section 179, certain expenditures (up to $500,000 in 2015) may be written off in the year incurred (Pub. #946, Page 19). There are several exceptions and limitations to this general rule, so you should discuss this option with your accountant.

If you would like to request a free SCORE Mentor, please click here.

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Everything a Start Up Needs to Know

Start up ResourcesOnce again we offer you a roundup of the multiple resources available through SCORE.

Starting Your Own Business

Want to start your own business? Our best advice to you is “Be careful!”

Why? Because more than half of new businesses fail in their first five years of operation. And, with that failure, the owner incurs a significant loss of time, money, and credibility and, frequently, his good credit rating.

Business Information Centers

Ohio, Kentucky and Indiana maintain information offices which provide start-up and operating businesses with free kits containing valuable information on taxes, licenses, permits, and other regulation requirements

Forms to Register your Business in Ohio

We don’t want you guessing what forms you need to launch your business in Ohio. This brief will direct you to the right resource to access:

  •  Business Name Search
  •  Guide to Name Availability
  •  Filing Forms and Fee Schedule

Area Public Library Reference Material and Services

We often forget about this valuable resource in our Cincinnati community. This guide will direct you to where and how to access the valuable information and people that can assist you with research and more.

Start-Up Costs of Going into Business

When starting a business, you need to plan for your initial costs and understand their taxation. This is not an area you want to guess about and you must understand what the tax implications will be. Don’t be surprised.

SCORE National Web Site Resources

We have put together a list with links to the startup resources that are also available through the national Score web site. There are 27 resources covering areas such as Identifying Your Sales Strategy to What to do First With a Great Business Idea.

IRS Considerations for Startup Businesses

Anyone starting or thinking of starting a new business should be aware of their federal tax responsibilities. This brief has the top seven things the IRS wants you to know if you plan on opening a new business this year or next.

Market Research

Market research is defined as research that gathers and analyzes information about the moving of goods or services from producer to consumer.

There are two main approaches to conducting market research. These include:

  •  Developing primary data via surveys and focus groups
  •  Using secondary data, that which is available through publicly accessible sources

Discover how to use them both to gather the information you need to create a successful business.

Service Providers to Small Business

It is not enough to have all of the information you may need but it is critical to have the right team in your corner to help you implement the information you have uncovered.

We want to offer a list of references to service providers in the Greater Cincinnati area in categories of primary interest to entrepreneurs and small-business owners.

Finally, don’t forget one of your team members can be a Score Mentor that offers mentoring for free. Request your mentor here.

These resources and much more is available on the Cincinnati Scores tools and resources page of briefs.

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