How do you decide your margins?

[EnrageEnterprise]

Ive spoken to a few business owners regarding how they figure out their margins on products and i got 2 answers:

1) Work out all your expenditure then price products accordingly

2) Set you margins, then try and reduce your expenditure to make them profitable.

The latter seems abit haphazrad to em to be honest.

How do you figure your out? 1 i assume?

 

[Chris Ashdown]

There is no easy one off answer to this question, you definatly need to take no 1 into consideration as you must make a profit to be in business

Next you have about three choices on price,
Low sell them quick and make profit from numbers sold
Middle Look at compertition and price simular
High expect high profit but low sales


Some items have little competition so can be given a much higher price than those with lots of competition

All I can suggest is that you study the price compeditor's charge and then play around with numbers in a spreadsheet, put in your costs, then expected sales and then play around with your prices to get the best fit

 

[Paul Kelly ICHYB]

Know the value of the item you are selling - what do other people charge/sell it for.
Know what margins your customer required (assuming you are selling to retailer, wholesales, reseller)
and then you will have an indication of what profit is available, assuming you know the cost of the commidity!

If you are in the lucky position of having something unique, rare or very new, you can demand higher margins, but dont base your business on margin - margin does not pay the bills, cash does!

 

[Cornish Steve]

Yes, you need to know what price the market will bear. If you follow a simple cost-plus approach (take your cost and add a percentage) you may be overpriced, under-priced, or anywhere in between. Why accept a margin of 20% if you deliver value that could earn you 80%? Why even enter a market where your competitors are making a loss of next to no profit?

In other words, value-based pricing is much better than cost-based pricing. Your margins should not be the only factor driving your price.

 

[Janeeb]

Can I just say that, as a new startup, this is a really good question and giving me food for thought - I've been mulling this over and over so please keep the advice coming!

 

You have to take a whole host of things into this....

Firstly, what price will you be competitive at?
What is your own breakeven?
Is there room there?

If yes, then settle with a price that suits.
If no, then do you have Value Added Services that allow you to exist?
If you do not have VAS, and you are still over-priced, then it just don't work

 

[hi-de-hi]

This is this question I asked in my very first post to UKBF only I didn't phrase it as well as EE. Profit margins are something I struggle with too as it seems I'm almost plucking numbers out of the air sometimes (after taking into account my expenses that is!) My OH says as a general rule of thumb don't ever go below 25%...

 

[EnrageEnterprise]

You have to take a whole host of things into this....

Firstly, what price will you be competitive at?
What is your own breakeven?
Is there room there?

If yes, then settle with a price that suits.
If no, then do you have Value Added Services that allow you to exist?
If you do not have VAS, and you are still over-priced, then it just don't work

Well for me, i will be trading on two levels - to local business and via the internet. From research i have found that i can beat pretty much all other local suppliers, sometimes by a very good %. If i stick to low prices i will get the business, but the margins will be the fairly low. However, i could simply offer to price beat their usual supplier (by not revelaing my prices to them in the first place), for example:

Shop A usually buys for 32+ VAT

I can sell as low as 23+ VAT, but i can offer shop A 30+ VAT and they'd be happy. (selling at 23 would yeild a 6 profit margin; selling at 30 would yield a 13).

IMO the price beat system should work well as we both get good deals. They might try and drive me lower and lower, which is fair enough, as i'll start alot higher than the lowest im willing to go.

Via the internet however, competition is much stiffer (obviously). I know i can beat 99% of sites out there, but do i just go in at the lowest price straight off?

Price beat system for local business.
Lowest price via the website.

Seems a good idea IMO

 

[lesliedocherty]

Hi,

in fashion we buy for 10 and sell for 25, with the toys i double up, with books i make 35%, with spraypaint i double up, i have it easy and just price along these lines.

 

[Paul Kelly ICHYB]

going down the price beater road is good, but done make yourself too expensive in the first place or people wont even look at the price match offer

 

[Mister B]

Some interesting points, but without a shadow of doubt, the one determining factor when setting pricing is what can the market stand? This in turn will determine the achieved margin which you may or may not realise.

When developing products or introducing products to the market, I always start in reverse. To begin with, calculate the selling price at which the market will sell at. From here you can calculate the gross margin from your cost price. If the margin doesn't work for you, then think about other markets or products. Alternatively, find netter suppliers.

With regards to achieved margins, it obviously does vary from industry to industry. As somebody else also mentions, it varies immensely on price and volume. For example the margin on a new car may only be 10% but 10% of a retail value of £10,000 is quite high. Conversely, a margin of 50% on jewellery would appear to be a lot higher, but if the average item value is only £50, you need to sell a lot more to generate the same degree of profit. Point of this is that you need to factor in actual £ profit and not just the % profit. Again, as somebody else points out, best way to do this is through a spreadsheet.

Good luck with your new business.

Mister B

 

[hi-de-hi]

I don't know whether there are any embroidery businesses here on UKBF, but I would be particularly interested in knowing how they determine their profit margins particularly as they have to buy in items and then sell them on again after being embroidered. Are there any embroiderers here on the forums who would care to share this info?

 

[Paul Kelly ICHYB]

hi-de-hi,

the main way of calculating profit/margins should be the same in any busines - knowing your cost is key!
Cost of items used i.e. parts, materials packaging
Plus
Cost of resources, in you case, the the cost of your time

Then, you know hat you sell it for, then you can work out your margin

 

[OhSoCherished]

Hi There,

I find with us my customers determine the price. I obviously start off at a price but you can quite quickly see if the product sells. If products don't move I drop the price ever so slightly. It's amazing how you can drop the price of a product which doesn't sell by just a couple of pound and they fly off the shelf and become one of your best sellers. It's happened quite a few times with us. So I would say don't ditch a product if not selling, try a different price margin and it more often works (for us)!

Originally we just start off by looking at other people who sell the product and try to undercut them if we can. Or approach the supplier and see if we can get a better discount!

If not we offer an incentive. A lot of our products are exclusive so that always helps with pricing.

 

[Cornish Steve]

Underlying all of this is your business strategy. If you're after the mass market, you're inevitably going to compete on price. These days, for manufacturing, that means outsourcing overseas and becoming, in effect, a marketing company. If you're targeting a niche market, then you are delivering added value and can charge a premium price.

So it's profit through higher volumes and lower margins or smaller volumes and healthier margins. The net profit comes out about the same.

 

[Chris Ashdown]

I don't know whether there are any embroidery businesses here on UKBF, but I would be particularly interested in knowing how they determine their profit margins particularly as they have to buy in items and then sell them on again after being embroidered. Are there any embroiderers here on the forums who would care to share this info?

We offer an embroidery service as a requirement by our customers, and basically charge it as a set charge that pays for the machine and covers any operator costs plus maybe a quid or two depending on what they want embroidered, our main money maker is the goods, but without embroidery we would loose a lot of corporate sales

Most pure embroiderers just charge a straight price of between £0.08 and £0.20 per thousand stitches and sone charge origination fees

 

[hi-de-hi]

Many thanks Chris for the reply. Can I ask the approx markup % you apply to your goods? Feel free to PM me if you would prefer.