16 Jan 2013
By Angelica Moreno
As discussed in the introduction to this series, the 4Ps of Marketing are Product, Place, Price and Promotion. Working through these topics is a critical component of ensuring the viability of your business. In this section, we continue to build on the discussion of Price.
How do you start to set prices for your products? From the first part of this look into Price, we established that Price must work in harmony with Product and Place, the two previous Ps of marketing discussed in this series. In general, your price needs to reflect your position in the market relative to competitors as examined in the first Price article. More specifically, price needs to be set at a level that is profitable.
Within every business, just like with brands, there is a pricing tier. These serve several purposes: attracting new consumers, getting consumers to pay more for a more premium product in the portfolio, to reflect different size offerings, and of course, maximizing the overall profitability.
Think about a hairdressing business; the more experienced stylists charge more than the junior stylists. For a product example, consider a brand of eggs such as Burnbrae Farms or President’s Choice. These brands offer white eggs, brown eggs, organic, free run or free range eggs and omega 3 eggs; not to mention the different sizes, small, medium, large and extra large. Each one of these offerings has a different price. Small white eggs cost less than omega 3 eggs or free run eggs. This range of products within a brand is called the product mix. The different prices reflect the pricing tier.
Getting back to making money, it’s important to note that Profitability/Income is not the same as Revenue. For instance, you sell t-shirts for $10 each. In one day you have sold 100. Your Revenue (or top line sales) is $1000. However, the cost of making each t-shirts is $2.50, shipping costs break out to $0.20 per shipment of 100 t-shirts, so your variable costs are $270 for 100 t-shirts ($2.70 per t-shirt). The Gross Income is the difference between net sales and variable costs, in this case, $730. Your profit per sale of t-shirt is Gross Income ($730) less your fixed expenses such as rent for your retail space, electricity for the space, insurance for the store, any labour costs for whoever is selling these t-shirts.
As you can see, making money is actually rather complex and for any business, there are two ways to increase revenues:
- Increase the price of an item or
- Sell more of an item (increase volume).
Based on the previous article, we’ve established that any product is only worth as much as the market is willing to pay. Therefore, in order to manage your profitability within this price range, consider each product you offer, your product mix. Naturally, there will be a range in profitability as some items are more expensive to produce than others. The goal is to balance the mix of products such that consumer needs are met by offering a variety of products at various price and profitability points.
Given that your business likely offers a variety of products or services, it’s critical to figure out the fixed and variable costs associated with each product or service you sell. This will give you a better sense of how to tweak your prices and portfolio mix (the mix of products or services you are offering) so that you can maximize your Income/ Profit.
Another point to consider is the consumer demand for each product. It might be that your most profitable products are the least popular. Therefore, you will need to sell more low profit items since you are unable to drive high sales volume on the more highly profitable items.
Balancing the right mix of products might also vary if your business is in any way seasonal. For instance, ice cream shops will usually offer the broadest array of products during the hot summer months when demand is high. In the fall and winter, it would make sense to not only reduce the number of flavours, but also switch in some seasonal flavours. Let’s say in the summer there are 30 flavours sold and in the fall and winter, this drops to just 20 flavours. Further, the bottom 5 selling flavours are switched out for seasonal flavours such as eggnog, pumpkin, candy cane etc. This strategy is easily applied to any business.
If you’re wondering how to use marketing to drive more sales, that will be covered in the next section of this series which focuses on P of Marketing: Promotions.
Angelica Moreno is a marketing professional who has managed the well-known household brands Becel, Hellmann’s and Sensodyne.