The Importance of Pricing for Profitability
The goal of any business is to make a profit. Understanding how to price the product or service your business offers is key to operating a profitable business. Eastern Shore Tax & Accounting can assist you with determining how your business could be more profitable.
Pricing for profitability is generating an income stream that covers all the expenses that your business incurs with enough left over for you to live on.
We start with your financial statements. How much money does your business earn? What does your business spend on direct product or service costs? What are the associated and fixed costs that your business incurs?
It varies by industry. Consider the costs of operating a restaurant as compared to the costs of running a plumbing business.
For a restaurant, direct product costs include the cost of food, beverages, cooks, wait staff and credit card processing. Associated costs are things like advertising, menus, linens, uniforms and cleaning services. Fixed costs include the cost of your restaurant building, insurance premiums and loan payments. Pricing for profitability includes generating an income stream that covers all the expenses that your business incurs with enough left over for you to live on.
For a plumbing business, direct product costs include the cost of plumbing fixtures and supplies, permits and the wages paid to your employees. Associated costs include advertising and the tools you need to do your job. Fixed costs include the cost for the vehicles you use in your business, insurance premiums and loan payments.
In addition to menu item pricing, for a restaurant becoming more profitable might include tweaking your menu items to include items with more affordable ingredients or reducing portion size.
For a plumbing business, becoming more profitable might include increasing the amount you mark up the plumbing fixtures you use for a job and charging customers for the time you spend picking up those fixtures and delivering them to a job site.