Maslins September 2009 Newsletter

With summer all but over, and people easing back in to "work mode" after the bank holiday, we decided you wouldn't want anything too heavy this month...so we settled for a brush up on the basics of pricing.

None of the methods described below is right or wrong, or better than the others. Some may only be suitable in certain industries. You may even feel you've covered all your options...but have you? It's always worth reconsidering your pricing strategy. If reading the below makes you question your own pricing method, give us a call on 01892 888 010 to see if we can offer some assistance.

The price is right...or is it?

Choosing the prices for your products or services can be one of the hardest decisions you'll have to make. You obviously need to have a price that more than covers your costs, but by how much?

Setting too low a price could lead to you being rushed off your feet for negligible reward, but price yourself too high and you may get no customers at all.

As well as your costs, you should also think about what your competitors are charging, and what customers are prepared to pay.

If you have a new product/service, do you start with a high price, knowing that because (for the time being) what you're offering is unique, you have a monopoly and people will have to pay what you ask? Or perhaps go with a very low price to try to dominate the market quickly before other businesses manage to copy what you do?

If you are in a fairly stable market, the main methods for choosing your prices are as follows:

Cost plus

You work out your costs, add on your desired profit margin to reach your sales price. Simple...well, it may sound that way, but what exactly are your costs? For example if you run a clothes shop, you obviously need to take account of the supplier's price of the items of clothing, but what about your rent, wages, and other overheads?

Cost plus tends to be suitable for businesses with minimal overheads. If your overheads are high, then how much do you apportion to each item? Do you ignore them completely but have a high enough mark up on your direct costs that you hope to cover your overheads too?

Break even - If you don't know what price to set things at, you're also unlikely to know how many things you're going to sell. You'll need to consider your break even point. This is the number of sales, at a given price, where your mark up on direct costs from all sales summed together equals your overheads. Click here for an easy to understand demonstration of this.

Competitor based

Find out what your competitors charge for similar products/services, decide where you want to position yourselves relative to them, and price accordingly.

It is a common misconception that you must undercut any other prices for people to buy from you. This can be true if the thing for sale is identical, and it is easy to quickly compare prices and choose who to buy from with minimal effort.

Local shops can still survive despite them often being more expensive than supermarkets. As well as the cost of the items to be bought, customers do (albeit often subconsciously) consider other factors like the time it will take to get the item, whether they can walk or do they need to drive/get the bus, will they get service with a smile.

Perhaps you should price yourselves deliberately above the competition to suggest your product is superior. Consider Stella Artois with their slogan "reassuringly expensive". Everybody knows Rolex watches or Ferrari cars are hugely expensive, and if you want a car/watch everybody knows much cheaper versions are available, but the huge price tag gives them a certain exclusivity. When you buy one (so I'm told!) you feel like you're joining an elite club.

Ok so setting yourself that goal as a new business is unlikely to win you many customers as you probably don't have the impressive brand name, but the principal still applies.

Customer based

What are your customers prepared to pay? Nobody expects you to be able to read the mind of every customer who approaches your business, but a bit of market research could provide an insight into what people would be prepared to pay for the product/service you're offering.

It is likely that a small minority of people will really value it and be prepared to pay a high price. If the price were a little lower then probably a fair few more would purchase. If the price were lower still you would get loads of customers. Can you somehow sell to the mass market at a low price whilst also selling to those who really want it at a higher price?

Price discrimination

This can be hard to successfully implement, but, if done perfectly, it is without doubt the most profitable pricing method you can use.

Price discrimination is setting your prices differently to different customers, hopefully in a way that makes everyone pay the highest amount they are prepared to. Does this sound crazy and hugely unfair? Well believe it or not it's happening all around us.

How often have you seen discounts for students, or those over 60? And have you ever noticed that when a new gadget is released, the prices start very high then come down over time? Or that supermarket food often comes in "value", "standard" and "deluxe"? There are several reasons for these, but one of them is price discrimination.

To some people, money is plentiful, and not really that important. Getting them to buy optional extras that will make their life a bit easier, or up-selling them the deluxe version at a higher price will probably be an easy task. For other people money is very tight, or they mainly buy on price, so they'll be most pleased with a "no frills" service that does what they want for minimal cost. Have a think about whether you could implement this in some way into your business.

Tax tip of the month

Who should own assets?

Are you a higher rate taxpayer and own buy to let properties, have a share portfolio, a large sum of savings in the bank, or perhaps valuable antiques/paintings? If so, it might be worth considering transferring these to your spouse, children or grandchildren sooner rather than later (caveat - tax reasons should of course NOT encourage you to do something otherwise ridiculous such as give your Ferrari to your 17 year old son!).

Transfers to a spouse (NB this currently does extend to civil partners, but not to unmarried couples) do not lead to capital gains tax or inheritance tax charges. If your spouse is in a lower income tax bracket, doing this could lead to a reduction in the tax charge on any regular income arising from those assets.

Transfers to children or grandchildren, provided you outlive the gift by seven years, are exempt from inheritance tax. Should you outlive the gift by 3-6 years, there will be a reduction in any tax charge levied upon death. Please note this only applies to outright gifts where you do not retain any material interest in the asset concerned. However, capital gains charges may apply, whether the assets are given or sold at under market value. The best assets to transfer down the generations are therefore appreciating assets. Those perhaps not worth much now, but that you believe will be worth significantly more in the future.

If you are concerned about the value of your estate and believe it may be beneficial to discuss how these should be distributed, then please contact us to arrange a meeting to discuss your personal situation.

Local Event

Speednetworking in Tunbridge Wells 15 September

You've probably heard of speed dating, well, how about speed networking? The idea is simple, you get ~30 business people in a room, and spend 3 minutes with each person.

In each 3 minute session, you need to listen to what the other person does, concisely get across what you do, then decide between you whether you'd like to meet up for a more detailed discussion at a later date.

It's fast, it's frantic, and it's certainly exhausting! But if you can think of a better way to get your message out to ~30 businesses in 3-4 hours for £25 I'd love to hear it!

Obviously an ideal scenario is that you'll meet some people who really want what you're looking to sell, and perhaps some people who sell something that your business could really do with. For those of us who aren't natural born "sellers" there's another excellent benefit though...you get ~30 attempts to test, tweak and improve, then retest your sales pitch...on real, independent people. What better way to learn!

Maslins top tips for doing well at speednetworking are:

• Take plenty of business cards, you'll probably hand one out to everyone there.
• Take a pen and jot down on business cards received what made that person stand out. At the end of the day you'll have a lot of cards and it may be hard to remember who was who!
• Take a bottle of water. All that talking will give you a dry throat.
• Be prepared to listen. You may think you're doing well if you do most of the talking in each session, but nobody will like you, and you won't get any business that way.
• If you're a graphic/web designer, printer, IFA or accountant, you're very unlikely to be the only one. Try to think what makes you different/better than any others who may be there.