Any business needs to understand its costs to be able to set a price – at least that’s one of the key things I would tell my students when I teach management accounting. Of course, another key point to mention is that sometimes the price will be dictated by the market the business is in.
If you read any of my posts, you know I like to give examples of topics I am interested in or teach. The Irish economy is not doing the best still, so I think it would be fair to say that consumers are price conscious and looking for a good deal. This means the market is leading the price to an extent. So what can you do as a business in this case. One thing is to try to reduce costs so that you make a profit at the market price. Another option is to change the product/service you offer – and I cam across a great example of this recently.
A new website emerged called www.10eurolifecover.ie. Normally, if you want to buy life assurance, you go to a broker/website and give the amount of cover you want – say €100,000. Based on things like your age and health, you get a price for the amount of life assurance cover requested. What this website does is fixes the price at €10 per month, and then tells you how much cover you can get for that amount. The idea seems like a great way to price in a market where consumers are probably more concerned with what they can afford than with the amount of cover they get.
With some commodity prices on the rise, and continued economic woes, some businesses are holding retail prices and reducing margins. Associated British Foods, which includes the low price high-street retailer in Primark (UK/Ireland and some European countries) is an example. In late April 2011, the company reported it wished to absorb material price increases rather than pass them on to end-consumers. Increasing sugar and cotton prices reduce the company’s margins. However the CEO reported that the company did not want to relent it’s status as a low price retailer in the clothing sector.
I’m a big fan of F1 and other motor sports. Putting on the accountants’ hat, sometimes the costs of the F1 industry astound me, but so too do the TV rights revenues and sponsorship deals. This article in The Economist caught my eye last November. It’s about a new attempt to break the land speed record. There are over 200 businesses involved in this. I’m thinking what is it costing them, and what revenues will they get back? Come on, a Cosworth F1 engine is needed to “kick-start” the jet engine that makes this thing go. I can imagine the roar of it, but the dent in someone’s bank account must be big too!
Setting a price is a very important task for any business. Set the price too high and sales may not come; set it too low and you might not make money or customers might perceive your product/service as poor quality. As an accountant, I would of course first think of costs – without a clear knowledge of what your cost base is, how can you sell something at a profit. But other things determine price too, like the customer and the competition. Given that I’m sort of on holidays, and writing accordingly, here’s a great piece from inc.com that will help you set a price.