The FreeAgent Blog
Posted on 30 July 2013 by Emily Coltman - Jump to comments
It's a hard task for a business to put a price on its products and services. After all, you can only charge a price that customers are willing to pay, but you also need to make sure that your prices are covering all of your costs and meeting your own business goals.
So how to find that right price? Here are two simple pricing techniques that can help you make sure that you’re covering your costs:
Cost-plus pricing method
At a basic level, your price should cover all of the costs of your product or service, otherwise your business will lose money. You can use your costs to set your prices with a technique called cost-plus pricing.
To calculate your price using the cost-plus technique:
- Add up all the costs associated with selling one unit of your particular product or service. Don’t just include the materials you used to make the product, but also delivery, postage, and a share of general business costs such as accountancy fees, and heat and light. Don’t miss out your own wages or drawings, either.
- Once you’ve added up all these costs, think about the “mark-up” you want to charge. This, broadly, is how much profit you want to make. On a product that costs £10 per unit to make, if you add a 20% mark-up this will be £2, so the sale price per unit will be £12.
What mark-up should I use?
There is no right or wrong answer about what mark-up you should use in your business - average mark-ups vary from industry to industry, so for example, check out this guide of retail mark-ups to see how diverse mark-ups can be. The most important thing is that you choose a mark-up that’s right given your own business needs and the marketplace you operate in.
If you’re looking for more detail about the cost plus pricing method, check out Joanne Dewberry’s excellent book “Crafting a Successful Small Business” This book focuses on the crafting industry, but its lessons about pricing will be very useful for most businesses.
Overall return pricing method
How much money have you put into your business, and do you want to get that money back quickly? The overall return pricing method helps you price your products with the aim of making back your original investment.
To calculate your price using the overall return method:
- Add up how much you’ve put into the business so far - for example, if you’ve spent £5,000 on the day-to-day running costs of your business and spent an additional £3,000 on equipment, your total investment would be £8,000 so far.
- Add up how much your total costs will be to produce your product or service for that year. Let’s say this is £7,000 in the first year.
- Add the two numbers together - so to pay yourself back your investment and cover all your costs, you need to make sales of £15,000.
- Divide that total by how many units of your product you want to sell, and hey presto, you know how much each unit will be sold for.
Of course, if you have made a significant up-front investment in your business, it may be unrealistic to cover all of your investment in one year’s worth of sales - to address this, you could use this same technique and split your investment cost over a number of years.
Pricing is a delicate balance between you and your customer - with these calculations, you can make a more informed decision about what price your business needs to charge, not just what the customer is willing to pay.
Posted on 23 July 2013 by Emily Coltman - Jump to comments
Increasing your sales volume is a key way to grow your business, but it’s also a challenging thing to do. So can you learn anything from those businesses who have succeeded in growing?
In the third part of her series of articles about growing your business, our Chief Accountant Emily highlights how three businesses successfully increased their sales volume.
1. Expanding into a new market - Tots Teas
The most obvious way to get more sales volume is to find more customers - but where do you find them? Here are a few things to consider:
- Expand locations - could you open a second location that would make your product or service available to even more customers? Is your current location the best place to get the maximum amount of customers?
- Expand your demographic - do you currently target a certain demographic with your products or services? What other similar demographics could you target to widen your sales potential?
- Expanding through franchises - If you’ve got a great business model that you think would work well for others, could you franchise that business? West Country-based children’s party caterers Tots Teas have chosen this way to grow nationwide, without the need to recruit employees or open expensive premises. Franchising is a common growth strategy among expanding businesses - and one that can achieve great levels of success.
2. Launching new products - Innocent smoothies
You could approach this either by adapting your existing product (which you may want to keep selling as it is, alongside the new product), or by launching a completely new one.
For example, drink company Innocent’s business started off as a small venture making nothing but fruit and vegetable smoothies. They’ve since expanded into making other wholesome consumables (such as veg pots, fresh fruit juices and now noodle pots) which matches their original brand vision, but also enables them to increase their sales volume.
For another great example of a brand launching new products, take a look at how skincare giant Beiersdorf started with their NIVEA cream in 1911 and has since expanded their product range into other related cosmetic products.
3. Expanding into a new country - Boutique London Lets
Taking your business to a different country could have great potential, even if you’re a small business. Boutique London Lets managed serviced apartments in London, but found that by sourcing and managing their staff online, they could quickly expand to many international markets - now 90% of their revenue comes from outside the UK.
While there is great potential for expanding internationally, these opportunities come with their own special considerations. When you’re thinking about expanding internationally, here are some things to keep in mind:
- What are the local rules and customs that you should avoid falling foul of? For example, if your business creates food products, do your current manufacturing processes meet the specific health or cultural standards that some foreign markets demand - or would you need to restructure your production line to achieve this?
- Is the language barrier a problem? That doesn’t just mean a different language altogether but also cultural nuances. Even if you are expanding into other countries where your language is spoken, it’s worth taking the time to get a native to review your copy.
- What about taking payment from customers in foreign currencies? Do you have the necessary banking arrangements in place to do that? If you don’t want to have a bank account in the local currency, look into the fees you would be charged to use a service such as PayPal to take payments in different currencies. It’s also worth checking out services like TransferWise to see if they can cut down on costs. Remember too that currencies change in value compared to each other, so you might be paid more - or less! - than you were expecting.
- And finally, what are the rules surrounding sales tax and VAT if you sell goods or services to different countries?
Hopefully these examples will give you a great starting point for thinking about increasing your own sales volume. In our next post, we’ll talk about how to balance both volume and profit margin, and the art of pricing.
Posted on 19 July 2013 by FreeAgent - Jump to comments
When you’re trying to grow your business, it’s worth taking a fresh look at your existing products to see if it's worth repackaging them to reach new markets. Here are four examples of businesses that took their product to new consumers with some clever repackaging.
Although a very successful brand on its native shores, Newcastle Brown Ale was perceived for decades as a gritty, industrial working man’s drink. But a swell of interest in the brew among 20-somethings in the US led to a vastly different marketing push Stateside. These days, “Newky Broon” is promoted in the United States as a high-end, premium craft beer range for ale aficionados, with an innovative advertising campaign behind it.
Some frozen and packaged food brands have been casualties of the growing organic movement as the freezer aisle has gone out of fashion. However, this Fast Company article highlights how three US companies are taking an innovative approach to repackaging their products to meet consumer demand for natural, fresh produce. For example, Lean Cuisine’s “salad additions” shifts their microwavable food away from the plastic tray and towards fresh salads to meet consumer demand.
JK Rowling’s bestselling Harry Potter series may have been originally marketed towards young readers, but that didn’t stop legions of adults jumping on the bandwagon. Publishers quickly mobilised to meet the new demand and printed adult covers for the books to reach a new audience. These alternate covers have proved so successful that Bloomsbury has now unveiled an updated set to entice a new audience of adult fans.
The classic example of repackaging a product is trusty old baking powder, found in most kitchens across the nation. Global manufacturer Church & Dwight created its Arm & Hammer brand of baking soda in the 1860s for baking, but in the decades since then, the company has taken advantage of their product’s deodorising properties to expand its product range into new markets ranging from cosmetics, oral care, and even dairy farming.
What products have we missed? Leave a comment or hit us up on twitter and let us know. Have a great weekend!
Posted on 9 July 2013 by Emily Coltman - Jump to comments
This month, we’re talking about ways you can grow your business - in this post, we’ll explore how you can use profit margin calculations to help inform your plans to grow.
How do I calculate profit margin?
To work out your business’s profit margin, or margin, add up the day-to-day running costs of your business over a set period of time - usually a year, but sometimes a month or a quarter. Don't forget to allocate your costs according to when they are relevant for your business, not necessarily when they were paid - check out our guide to allocating costs here.
Then take the amount of money you earned over that same period, and subtract the running costs from that number. This number is your “net profit”. If you have a set of accounts, you can also pull these numbers from your profit and loss account, or P&L for short.
Take that net profit figure, and divide it by the total amount of money you earned in that period. This is your business’s net profit margin.
Smart ways to break down your profit margin calculation
On its own, a high-level profit margin figure isn’t a very useful metric when planning for growth. Calculating profit margin is most useful when you take it in context, or use it to compare parts of your business.
Profit margin over time
A great place to start is to calculate your profit margin over different points in time - for example, you might compare this year’s margin to last year’s or calculate last year’s margin on a month-to-month basis, and see if your business has kept more profit per pound of sales this year than it did last year.
If you see a difference in the margins, can you pinpoint why that happened? Have your costs gone down since last year, or have you sold higher priced products or services? Try thinking about your business like Google’s stock charts - Google highlights important news and events over the chart’s output, allowing you to pinpoint when events might have shifted the numbers. If a supplier raised their prices in January and your profit margin dipped in February, you may want to dig into those costs - you could potentially look for another supplier, or raise your prices accordingly.
Profit margins by customer type
What is your most profitable kind of customer? For example, if you sell to customers both directly and through a third-party, which channel has the highest profit margin?
There are a lot of interesting ways that you could categorise your customers, so it’s worth thinking about what’s the most relevant for your business - here are some customer type ideas to get you started:
- Size of customer’s business
- Customer’s industry
- Direct customers versus customers through resellers
- Public sector versus private sector customers
- Customer’s location
- New businesses versus older businesses
If you spot any customer types that have a higher-than-average profit margin, you can then start to think about how to attract more of these kinds of customers. Similarly, if you spot any unprofitable categories of customers, you might consider planning to phase out those customers over a period of time.
Profit margin by product or service
If you have a range of different products or services in your business, which one makes the most profit for you?
For example, if you make furniture, is your margin higher for sofas than for chairs, because there are extra costs involved in making sofas? Once you’ve spotted any whose margin is above average, you can think about how to sell more of that product. Or, you might consider raising your prices on a product with a less-than-healthy profit margin.
If you sell time-based services in your business, which services work out as the most profitable for you? Don’t forget to take both your billable and non-billable time into account - you can track both in FreeAgent, and tracking non-billable time is an important way to keep an eye on the true profitability of each service.
Profit margin by project
If you track your work by projects, which project is earning you the highest profit margin? Luckily, you can use FreeAgent to automatically report on the profitability of your projects.
Tracking profitability by projects allows you to break down your profit margin at a very granular level, and it might be useful to group together your project types to look for trends. For example, if you are a graphic designer, do you always spend more unbillable time on print projects when compared to web projects? If so, you might want to consider revisiting your pricing model to improve your profit margin on those projects.
Hopefully these ideas will give you a great starting point for using the profit margin calculation to grow your business. In our next post, we’ll explore ways to increase your sales volume as another avenue for growth.
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