One thing I've learnt over time is to never leave anything to chance, especially in business. It's important to make data driven decisions. This means collecting and using the information around you to choose those options which give you the best outcomes. While you will not always get it right all the time, it's important to err on the side of caution.
So with that said, many small businesses seem to be unknowingly undercharging for their goods in an effort to be competitive. They set prices based on the markets and totally ignore their internal cost structure.
Some industries (like retail) are about moving volumes. The profit margins are often quite small and so the only way to be profitable is to sell as many units as you can, while minimizing your costs. However, you can only manage your costs effectively, if you understand them.
How to set a good price
There are 3 factors to consider when setting prices:
a.) Your costs
b.) Your competitors
c.) How much your customers are willing to pay
However most small businesses focus only on their competitors and customers while virtually neglecting their own cost structure. The purchase price of a product is part of the cost, but there's more to it. Ignoring your costs and simply focusing on your competitors and what your customers want hurts your business in the following way.
Each business is unique... "Some are more equal than others"
Remember, each business is unique. We might be selling the same product at the same price, at the same flea market.. right next to each other. However our cost structures are different. One buys a coke, russian and chips everyday first thing in the morning, while another might carry a lunchbox with a cooked meal and a bottle of diluted juice. One drives to work, while another takes the bus. One likes to pamper themself during weekends whilst the other is frugal. One has a maid the other does not. One has a granny that needs medication, another does not. So at the end of the day, even if we both sell goods worth $100, that is not how much each of us have in terms of profit value.
Are we together? #YourMathsTeachersVoice
Here's how it works
It's not rocket science really, and I'll break it down
• Each item in your store is supposed to contribute towards your monthly fixed costs i.e. rent, salary, transport etc.
Think of it this way...
The parable of the broke friends
You go out for dinner with friends every weekend. However all your friends are always broke. So you pay for everyone this week and maybe even next week. However, if this continues for a long period of time it ends up becoming a burden to you. You end up not buying all the things you really want to eat, in order to accommodate everyone else. Eventually, you might even start skipping those weekly dinners. It would have been much easier if everyone made some form of contribution, right?
The same applies to your business. Each product in your shop should make at least some contribution to your rent, salaries, rates and so on. If your products aren't contributing enough... some will start "dodging" and your shelves become empty.
Break even analysis helps us calculate the contribution that each product needs to make to sustain the business.
If all of this doesn't seem to make sense, then the only thing you need to understand is this:
• You need to sell enough units to cover all your monthly costs. Simple!!!
Rhetorical question:
If your rent is $500 and you have stock worth $1000 do you honestly think you will be able to cover all your expenses without hurting your business? Will you survive 3 months in business? How much would you need to sell to make a profit of $500 each month? This is why it's important to do your break even analysis.
Break-Even Analysis tells you:
I. How many units you need to sell to be profitable
II. What prices to charge for your products
III. Whether to continue or discontinue selling specific items
🚩🚩🚩Some common red flags
1. If you find yourself having to borrow money constantly to finance your business, then maybe it's simply not as profitable as you think... and you can find out by crunching the numbers. Throwing more money at your problems will not make them go away.
2. If you buy stock and then 3 months down the line you find that your quantities are shrinking and your shelves keep getting empty. You are probably still in survival by default, but that business might not be sustainable.
3. You're now looking at people sideways 😒 because you think they are stealing from you. Truth is that you might just be getting vexed by your numbers.
There's a solution
I'm sure you might be thinking _"Aw snap! I missed class the day we were supposed to do Break Even Analysis 🙆♂️" Don't worry, I got you covered. I know most of us find the maths behind break even calculation a bit complicated. That's where I come in. We've created Asaqèni Business Pro to help you easily calculate all that. _Asaqèni Business Pro_ has a simple price calculator to help you with all this.
Disclaimer:
The goal isn't to leave you disheartened after you find out you're undercharging. It's simply to help you make more informed decisions so that you focus your energy where it matters. I know it's tough when you have to consider closing a business you worked hard to set up, but it's much better than toiling in vain.
Also note that it doesn't necessarily mean it's the end. It simply means fix whatever is wrong.
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