Article by Brian McCauley
How do you determine a product’s sell price? Many business professionals focus on its cost to figure out the margin. However, companies should consider other factors to maximize profits.
There is often a preconceived notion of the margin needed for a branch/yard or market. That margin percentage is then applied to a lot of products, often in increments of 5 percentage points. But, who’s to say the preconceived notion is accurate? Why apply a 25% margin, and not 26%, 27% or 28%? Should you make the same blanket margin percentage on all of your products, or make a higher percentage on options, and other accessories? How about rounding prices up to the nearest nickel, dime or quarter?
Unfortunately, our fear of losing a sale, because of price, often prevents us from thinking this way. This fear puts downward pressure on our pricing and our profit, as well. Years ago, a contractor was in my home pricing the labor costs to replace the windows. After reviewing the scope of the job, and explaining how he replaces windows, and what was included, he told me he gets $65 per window to perform the labor. I said “OK” and hired him to do the job. What do you think I would have said if he told me he gets $69 per window to perform the labor? I would have said “OK.” But he had a preconceived notion of what he charges for the service and left money on the table.
Once the margin percentage is determined, there is often confusion in calculating the sell price. Does your sales team know how to calculate margin? There is a big difference between mark-up and margin. A common mistake is a product is marked up 25%, thinking that will provide a margin of 25%. However, that markup of 25% only realizes a margin of 20%. For example, imagine that you buy a widget for $100 and set your sell price for that widget at $125, thinking the margin is 25% ($100 X 1.25 = $125). But in reality, your margin is only 20% ($25 / $125 = .20). To get a true 25% margin, you must divide the product cost by .75 (1 minus .25). So, to realize a 25% margin on a product that costs you $100, you must sell it for $133.33 ($100/.75).
If you only focus on a product’s cost to determine its margin and sell price, you could be shortchanging your company. It’s important to remember that the market you operate in and your company’s position in the market go a long way in determining your prices. Professional salespeople must completely understand a competitor's products, service levels, programs and be able to compare them to their own. They also should be able to succinctly communicate to a customer why their product is worth more than the competition. What are the three to five things about your product, service, or program that make it worth an extra $5, $10, or more? This requires a clear understanding of your market, along with the confidence to both sell your price, and defend your price.
The alternative is to lower your price again and again to keep matching competitors and seeing profits erode, which ultimately affects all aspects of the business. Instead of asking a customer what they want to pay for your product, ask them what they need to sell it to their customer for. And work backward from there—it may be an easier way to go.
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| July 01, 2019