If I mark up my costs by X% that should be sufficient?

You too can increase profits without necessarily increasing sales!

How?

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Possible leaks could be anywhere.

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"Adam, over the past six years, I've had the pleasure of 'bumping into you' on at least three business and marketing related forums. Your contributionsto discussions have always been courteous, astute, incisive and practical,delivered with good humour, and based upon 'real-world' business experience. You are clearly an experienced business professional who actually knows what he is talking about. I wonder if your clients know what a gem they have in you? As one business professional to another, I salute you.

Good Wishes,
John Williamson - The Wealth Coach
www.thewealthcoach.com
www.retaildisplaysecrets.com

+++++++++++++++++++

I just LOVED "7 Clues to a Profits Leak".

Steven Walker - Profit Improvement Advisors
Calgary, Canada

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You will be proud how your protégés are proceeding! We have expanded the business to Katherine and Alice (Tennant is also on the list). T he catering side of the business is far less stressful and is actually profitable, now that we only take the good jobs.
We will never forget the assistance you gave us in re-inventing our business!

Karen Sheldon

Managing Director

Karen Sheldon Catering

Darwin, Australia

+++++++++++++++++++

The chap is Adam Gordon whom I have known for many years. He is a former resident of Darwin having lived here for perhaps 25 years, is an excellent communicator and has a very good appreciation of small business, business plans and all that goes with it. In fact Adam is regarded as a business guru.

Charles Wright, QS Services, Darwin, Australia

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Thanks for the catch-up the other day. It's great to be working with a legend in the small business community.

AJ Kulatunga, BLKMGK ICT

Darwin, Australia

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The 7 Clues is a great.

What I like the most in the Seven Clues report is that it clearly explains that accounting is merely a subset of proper financial management and

that only the business owner can practise financial management. The accountant does the accounting, and in doing so supports the business owner's financial management. And the business owner uses the accountant's information, but relying on the accountant to do full-blown financial management is short-sighted.

The report nicely "grounds" an otherwise complex topic which many business owners are afraid of touching, so they often move ahead in blissful ignorance. The water hose and the soggy soil under the leak makes an excellent and easy-to-comprehend example, upon which the financial management concept is nicely built.

Tom "Bald Dog" Varjan, Organisational Provocateur Dynamic Innovations Squad
Personal and Firm-Wide Performance Improvement for Management Consulting Firms

Vancouver, BC Canada

+++++++++++++++++++++++++++++
You have played a very important role in my development in business.

You were there with the right information at the right time, I thank you for that.
By adding the next level of systems, and marketing knowledge that you brought to the table we able to identify our objectives, acknowledge the gaps in our business and put in place the planning so as to achieve those objectives. Within 5 years we achieved 9 of our ten stated objectives. In that same year we won the NT Telstra Small business of the year"

Greg Haigh
Director - Trade Group
Regional And Northern maintenance services
RANms

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Do you need to make changes to your business?
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How to improve your quotations
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Do you want to make better planning choices?
Are youmaking these mistakes in planning?
How to use SWOT properly
Does your sales conversation balance the scales of justice?
The perils of profitless cash flow!
So what is more important, cash flow or profit?
Are you getting value from your pricing?
Do you report to yourself monthly?
Follow the money trail!
Performance also counts!
Get more bang for your buck!
Without measurement there can be no improvement!
Where would your business be without customers?
Using your monthly report to improve your profits
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And what do you know about your customer?
How branding can increase your profits!
Can branding make you more money?
How to balance the value equation
Tilting the balance in your favour
How to pin the tail on the donkey
Are you groping in the dark with your real cost of labour
Mastering core marketing principles
Building a 5P marketing plan
Profit leaking processes
Should you be trying to increase or decrease cash flow
At times it is folly to hasten
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What will be the X-Factor in 2009
Lies, damn lies & statistics
How to use a squad profit leak detectives
Confidence leads to action
Increase sales - so easy to say
So you want to know how to increase sales
Is selling a necessary evil?

If I mark up my costs by X% that should be sufficient?

Shouldn't it ?

Just how do you arrive at your selling price? Do you follow a formula, taking the cost of the product you're selling and adding a margin - 20%, 33%, 50%, 100%? Do you have a pricing strategy or policy? And is it based on your costs, or your market?

Many small businesses base their prices their costs plus a margin. Those that don't usually base their prices on what the competition charges, which is even worse, but that is another story.

What do you do?

There are problems with this pricing strategy:

The price has no relation to what the market will bear. You could well be leaving money on the table, or losing sales because the market doesn't agree with your price.
Do you know your costs accurately? Many small business accounts do not accurately separate variable and fixed costs. If your mark-up is to be accurate you need to know this. A mark-up based on inaccurate costs is meaningless.
The gross margin you show on your product will certainly not be the same as the gross margin on your income statement.
Profitability is measured as a percentage of sales, not as a percentage of costs. For example a mark-up of 50% gives a gross profit of 33.3%.
It assumes that the customer has some idea of your costs.

There are two foundations to an effective pricing strategy and they are both based on knowledge: knowledge of your costs, and knowledge of your market.

Mark-up prices are based on the direct (variable) costs of a product or service, that is, on what it costs to acquire or manufacture the product. So you buy a widget for $100, mark it up 50% and sell it for $150. But are there other costs associated with the cost of the product such as:

Freight in

Delivery to your customer
Warranty
Commissions
Consumables

Many of these costs are often buried in your overheads. If so, part of your mark-up must go to recovering them before contributing to your overheads and, once you've got past the break even point, to your profit. The point is they're variable, that is, the more you sell the more you incur. Fixed costs are just that - fixed. The more you sell the more your margin contributes to their reduction, the quicker you get to your break even point, and the quicker the profits roll in.

For the profits to roll in you need to know your cost structure - accurately.

Your price should be a market price, not a cost price.

Your customer is not buying your product on what it costs you. He or she is buying it on the value it will deliver to them. Will it save them money? Will it overcome a problem, fix something? Will it relieve the pain? Will it enable them to do something more quickly, or more easily? There's a value on that.

What is that value worth to the customer, because that is what they are willing to pay.

Understanding your market place and the problem your product really solves for your customer, and the value it delivers is critical in have in an effective pricing strategy. And if you can't deliver that value at a cost that leaves you a profit, then you should ask yourself whether you should be in that market.

A pricing strategy based on a percentage mark up will only be sufficient accidently.