Pricing for Beginners

Question: I am new to the business. Do you have any advice as to how to price items?

Answer: Pricing is complex. On one hand, you want to maximize sales, but if you price items too low, you might end up doing lots of work and making very little profit. Also, if you are known only for low prices, you may have difficulties building a loyal customer base. For this reason, it's wise to pay close attention to your gross profit margin, which is your gross sales less cost of goods sold.

As you probably know, most suppliers quote list prices with letter codes that indicate what percentage calculation is used to determine the net price. The letters "A" and "P" still make me smile!

I would say that suppliers code the majority to have a gross profit margin of 40 percent (the cost of the item to you is 60 percent of the list price), and this was my goal for my overall gross profit margin on an order. I made that decision in a bit of a vacuum without any validation of my approach, however.

In my work on the accounting side of the business, I talk to distributors daily. Gross margins are a frequent topic of conversation. When asked, the majority of distributors say that they, too, aim for 40 percent. Of course, there are some orders that have a higher margin, such as small orders or ones where you put together a custom package and have more latitude in the pricing. Other orders, perhaps large orders or ones in which you are in a bid situation, might require a lower margin to get the order.

If you keep an eye on your margins overall, you will be able to have a better handle on pricing and budgeting. Remember that the name of the game is profit. Pricing your orders too low might result in higher sales, but not improve your bottom lines. And it will be a whole lot of work.

Please email accounting questions you would like considered for the column to HGatter@AccountingSupportLLC.com with the subject line of "Ask the Accountant."