How to Compute a Sale Price on Products and Services
The coronavirus has dramatically changed how businesses operate, and the pandemic has made it tougher to generate a profit. A WalletHub survey (conducted in April of 2020) reported that 87% of small business owners were struggling, due to the virus.
Owners are reviewing every component of the business, and finding ways to adapt. If the pandemic has impacted your profits, take a close look at how you determine your sales prices.
To determine your sale price, start with the cost-volume-profit (CVP) formula.
Using the cost-volume-profit (CVP) formula
Here are the components of the CVP formula:
Sale Price – Variable Cost – Fixed Costs = Profit
Assume that you manufacture sporting goods equipment, and that you consider these variables to price a baseball bat:
- Variable costs: The cost of raw materials and manufacturing costs total $30 per bat.
- Fixed costs: You allocate a portion of overhead costs to each bat, including lease payments on your building and salary costs for the home office. Fixed costs total $20 per bat.
- Profit: You want to earn a $10 profit on each bat sale.
Assuming that your sale price is “X”, here is the price that should be charged:
X - $30 - $20 = $10 X= $60
The $60 sale price produces a $10 profit per bat. However, there are some other factors that may change the sale price you charge to a specific customer.
Understanding customer acquisition costs (CAC)
Customer acquisition cost (CAC) is the expense incurred to convince a customer to buy a product or service. A low CAC means that you can charge as a lower sale price and still earn a profit
According to Neil Patel, CAC is calculated by dividing “all the costs spent on acquiring more customers (marketing expenses) by the number of customers acquired in the period the money was spent.”
Analyze your sales and marketing efforts, and focus on the campaigns that produce the most revenue. Assume that your sporting goods company launches a campaign to market baseball equipment (gloves, bats, and uniforms).
Prospects like what you offer, you see a big spike in baseball equipment sales to new customers. When a retailer signs a purchase agreement for baseball equipment, you offer to sell baseballs at a discounted price. Since you’re already spent the marketing dollars, you can discount the price of baseballs and still generate a profit.
How long is your sales cycle?
Products with a long sales cycle require more spending, and you need to charge a higher sale price to recover the higher costs.
A sales cycle “encompasses all activities associated with closing a sale. Many companies have different steps and activities in their sales cycle, depending on how they define it.”
Assume, for example, that you own a construction company that builds schools and university buildings. It may takes years of marketing to find a prospect, develop a relationship, and finally to create a proposal for a project. Your sale price must include the sales and marketing costs incurred over time.
The impact of customer lifetime value (CLV)
You can charge a lower sale price to customers who generate repeat business. If a client has a high customer lifetime value (CLV), you can charge less on a particular sale.
Qualtrics defines CLV as “a measurement of how valuable a customer is to your company with an unlimited time span as opposed to just the first purchase. This metric helps you understand a reasonable cost per acquisition.”
Think about an auto repair shop. Once a customer finds a reliable auto mechanic, the car owner may use the shop for ten years or more. In fact, many auto repair businesses generate the vast majority of sales from repeat customers. A business that serves repeat customers can spend less money on marketing and sales.
The repair shop can afford to discount the price of some repairs, because the customer will generate a profit over the long term.
Finally, ask for discounts when you deal with vendors. Whenever a purchase order is approved, the buyer should attempt to negotiate a lower price. Avoid the mistake of simply accepting the price you’re quoted.
To compute a sale price, start with the CVP formula, and make adjustments based on the other factors listed above. When you’re a buyer, work to lower the costs you pay for goods and services. You need to make changes to increase profits, and that includes reducing the time needed to complete paperwork.
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