Question: My partner and I have run a manufacturing business for a number of years now, but lately we’re struggling, more and more, to make ends meet.

With everything seeming to get more costly, from wages and materials to running costs, we’re in a battle to stay profitable.

We think we need to reevaluate our prices, but we don’t want to don’t understand how to keep on top of our prices and if or when we should increase them.

Our profits seem to be getting lower and lower. How can we get on top of this better?

Answer: There is no simple answer regarding pricing strategies – there are different approaches like cost-plus or value-added models.

However, the reality is that most businesses are relying on elements from various models. Your pricing should reflect your costs, the demand for your products or services and the competition you face in your industry. To establish the right model for your business, there are some key areas that you’ll need to consider.

1. Are you sufficiently covering costs and making the expected margin?

You need to understand the costs attributable to your products and services.

Consider the direct costs of materials and wages, and include allocations for rent, rates, electricity and all other overheads in your business. If the basis for this calculation is inaccurate, your business may not generate the expected profit margins.

For example, John has an agri-manufacturing business. His top-selling product is priced at €999 plus VAT. John has adopted the cost-plus model, and he expects to make a 21% margin (approximately €210) on the sale of this product. However, upon review, John discovers that he has not included electricity or insurance in his list of costs.

The result is that the product costs €821 to produce, not €789 as he believed. Therefore, the actual margin achieved was less than 18%. If John wants to achieve his 21% margin, he needs to increase the selling price to approximately €1,039 per unit.

2. Does your competitors’ pricing heavily influence your selling price?

Without a doubt, the price you charge can be influenced by alternative options available. Some products may be very price sensitive and therefore, the above cost is crucial to understanding its profitability.

It also leads to a discussion about how a product is manufactured and if any efficiencies can be gained in that process. Go back to John and his €999 product. He has just discovered that it costs him €32 more per unit to produce when he factors in all his costs.

His competitors are selling their products at a similar price point, and John fears that increasing the price by €40 will affect his sales volumes.

As an alternative course of action, he has decided to review the materials costs and the time it takes to produce the product.

He discovers that one module in his product has increased considerably in recent years, and he has now sourced an alternative supplier. This will reduce the product cost by €20.50 per unit. He also discovered that investing in new equipment to assemble the product would reduce the production time by 25%. Even with the cost of purchasing the automated equipment, he will save approximately €10.50 of wages cost per unit.

This would mean the cost of producing the unit is now €790, and he could sell it for €999 while still achieving his 21% margin.

3. Is there a real unique selling point that differentiates your product?

Understanding your costs is crucial, as is knowing the competitiveness of your market.

Consider if your product has a unique selling point (USP) ie it can do something your competitors’ products cannot do or that it is more efficient.

In his journey to understanding his costs and products better, John has been considering this. His product is priced in line with his competitors. He does not actively market his product and instead relies on his brand to attract customers.

In his review of alternative products on the market, John discovers that his product is 20% faster at processing liquids than the alternative offerings from his competitors.

This fact could be very important to his customers, who will consider electricity and wage costs. If John were to market this differentiation, it could allow him to consider a price increase while simultaneously achieving more sales.

A pricing strategy is key to successfully operating your business. It is promising that you have noticed the need to revise your process, and a drop in profitability warrants a price revision. A good starting point is to review your business costs and begin to cost each of your products and services.

In short

Our example shows how ‘John’ can bring his 18% margin up to his desired 21%.

Review processes – is there a more time-efficient way to produce the product, minimising wage-related costs?

Review overhead costs – are you getting your best rate for electricity, insurance etc?