The Australian Small Business Blog

Tuesday, February 16, 2010

Breaking the Link between Cost and Price

Businesses often use simple formulas to calculate their prices. Usually based on some on some mark-up, so in a store all items might be priced with a 60% mark-up on cost with the 60% covering wages, overhead, and hopefully profit.

In a businesses where prices are easy to compare, this practice is rife, but for more complex services or businesses which package their products in ways that can’t be compared, this restraint need no longer apply.

Many years ago in Melbourne, I heard Kevin Dennis, the used car king, being interviewed about how he started in the auto industry when he left school. He always had a passion for cars, and had the opportunity to be interviewed by the principal of two different car dealerships for a job. One was a new car retailer, and the other was a used car dealer.

He found out where they lived and saw that the used car dealer was far wealthier than the principal of the more prestigious new car business. Which is why he went into used cars.

New cars are commodities. Used cars have histories that make them difficult to compare and value, and so the margins are far higher. The used car dealer also gets to bargain twice, when buying and when selling. Quite often a new car dealer can make more money from the trade-in at their associated used car lot than they can from the new car where margins are fixed.

Pricing on value also depends on being able to sell to those who value the utility of the product rather than the cost of supplying it. This is beautifully illustrated in the video below (caution some mildly strong language).

While this is of course exaggerated, a similar shop in a less wealthy area with the items poorly presented would not be making the margins of the store in this video. Environment, presentation and packaging are all important elements in the establishment of value.

These are just some of the steps to take to break the link between cost and price.

May Your Business Be - As You Plan It.

Over to You. What do You Think? Post Your Comments Below.
Dr Greg Chapman is the Director of Empower Business Solutions and The Australian Business Coaching Club and is Australia's Leading Advisor on Emerging Businesses and provides Coaching and Consulting advice to Australian Small Business Owners in Marketing & Business Strategies Planning & Systems. He is also the author of The Five Pillars of Guaranteed Business Success.

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