Business Media Articles (Archived)

Danger in unrealistic product pricing

Next to poor cashflow, one of the biggest reasons for the failure of emerging businesses is the fact that they operate on insufficient profit margins. Product is priced at unrealistically low levels; not because customers won't pay a market price, but because they are not being asked to pay it.

All too often we see successful business start-ups flounder as the company grows and its owner loses touch with the day-to-day running of the organization. Gone are the days when prices were calculated 'on the back of a fag packet' by an emerging entrepreneur who knew exactly the income needed to cover the overheads.

Unfortunately that same owner often doesn't recognise that he or she isn't in possession of the full facts and that's where pricing mistakes can happen.

Without over simplifying matters, may I suggest that anybody involved in pricing policies should employ the basic percentage ratio of costs against income. It is an extremely quick and easy mechanism to apply and if it is employed on a monthly basis the health of the business will become immediately apparent.

As a factoring company serving the small business sector we have every sophisticated financial aid at our disposal but the first we employ when discussing our clients' accounts is the ratio mechanism. We appreciate that very few people are in the unique position of being the sole provider of a product that everybody wants and therefore is able to levy vastly inflated prices that will guarantee an impressive balance sheet.

Many small businesses do operate in niche sectors, offering specialist product to a small but intensive market where quality brings its rewards in premium prices. But for the majority of companies, they are in a competitive market where the added value of quality and service will have a significant bearing, but price is equally as critical.

Quality is priceless, yet the inclination by some is to keep the price as low as possible in an effort to maintain turnover, and this can be the road to ruin. Employing the ratio mechanism highlights this straight away. Tracking the ongoing performance of the company by linking ratios to sales is simple to apply (take the total income and divide by the total costs and express the resulting figure as a percentage) and it is not just informative it is conclusive.

Of course, the statistics that are being fed into the equation must be correct, and one of the ways of ensuring that, is to outsource activities and services at a known, fixed cost. These could include pay roll service, telephone personnel services, and, of course, factoring of the company's invoices. The latter not only provides a known cost in advance, it comes with the backup of a full credit control service ensuring rapid collection of outstanding debts (on top of the agreed immediate payment once a sales invoice is raised).

Enhanced cash flow enables companies to negotiate better terms from suppliers in return for rapid payment ­ all good news when it comes to pricing of products.

But, more than that, most of the independent factoring companies in Britain, and there is a significant number from which to choose, also provide a sounding board for owners to discuss all aspects of their business. They will, in effect, replace the now almost-defunct bank manager.

A factoring and invoice discounting house will introduce a new dimension to an emerging company where, not surprisingly, things sometimes get out of control as the owner and founder is concentrating on growing the business. It brings a vast knowledge and a wealth of experience to all its customers.

In fact, it reminds me of the plumber called to a house where there was a problem with the pipework. Having hit the pipe to release an airlock the plumber presented the owner with a bull for £125. When he was asked to justify the amount he broke the bill down into two elements: £25 call out and £100 for knowing what to do when he arrived.

It may be rather an extreme example but it does show the worth of a professional and the value of surrounding yourself with people who know their business.



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