Permanent wages and salaries are generally not included in COGS because they stay the same no matter how many sales you make.
What are pricing strategies?
Now that you know your COGS, you know the minimum amount you have to charge to make money. But it helps to have a system to work out what you should add. That’s what a pricing strategy is.
“Avoid a mismatch with what you think a customer will pay for, and what they’ll actually pay for. Have an open conversation with prospective customers about what they really want, to make sure there’s a real need for your product or service.”
Paco Nicole, How To Not Freak Out About Finance, Xero partner
Cost-plus pricing strategies
You can simply add a standard markup to everything you sell. Check if there are industry-standard markups, as they can give you a good place to start. An accountant or bookkeeper with experience in your industry will know.
Market-based pricing strategies
Check out the range of prices that your competition charges and:
It’s not a good idea to go low unless you have a steady supply chain and expect a lot of sales.
Some businesses bundle a few things together at a slight discount. Their profit margins come down but they sell more items as a result. Some market research will tell you what product combinations will work.
Launch pricing strategies
New products (or businesses) sometimes use temporary pricing strategies to try and grow their customer base. These include:
Penetration pricing where you lower margin to increase sales volume. This can attract new customers fast, but the trick is to keep them when your prices go up.
Price skimming where you hike prices on new products or services believing that enthusiastic early adopters will pay more. Then you drop prices later on.
- Sweetener deals where you set prices high but offer introductory discounts. It allows you to create the feeling of a deal without permanently devaluing your product or service.
Pricing methods and COGS are key to profitability
You have two levers for making money in business – your margin and your sales volume. They’re both affected by price. So give lots of thought to what you charge.
Start by working out your COGS, so you know the least you need to make on a sale. And then use some of the pricing strategies outlined here to work your way toward a ticket price.
Accountants and bookkeepers can help a lot with the numbers. They will understand industry norms and can help tell if your margins are too thin.