While starting a small business is partially about chasing your dreams and seeing them come true, it is also about numbers and learning how to turn a profit. If your head starts swirling when you hear people talking about trade price, retail price, market price or wholesale price, you are not alone. Learning how pricing works can help you navigate the ropes of financial success for your small business and ensure you have the money necessary for operations and consistent growth.
Understanding Trade Price
When you purchase goods or materials from your supplier, you will pay less for them than the price for which you will sell them. For instance, if you operate a coffee stand and sell chocolate-covered espresso beans at the register, you might buy them from your supplier for $2 per bag but sell them to your customers for $4.50. The $2 price that you originally paid for the espresso beans is the trade price, also known as the wholesale price.
Understanding Market Price
Market price is the price that your customer actually pays for the goods you sell. For instance, if you run a custom clothing business, you might charge $13 for a basic custom T-shirt. This is more than the cost of materials and labor but still a reasonable cost to which your customers are receptive.
Likewise, if you sell violins out of a music shop, you might purchase the violin for $1,200 but sell it to your customer for $1,800. That final sale price is the market price.
Market Price vs. Retail Price
Market price and retail price, also known as list price, are not always the same thing. If your business purchases a company car to help make deliveries, you are unlikely to walk into the car dealership and pay the manufacturer's suggested retail price with no questions asked.
Instead, you know that the car dealership is operating with a profit margin, and you can negotiate the price down to fair market value, which is what most other customers would pay for the car.
Why Retail Price Is Higher
Retail prices and market prices are almost always higher than trade prices, and this is necessary in order for your business to turn a profit. If you sell your goods at the same price point for which you purchased them, you will not be able to cover your overhead expenses let alone make payroll. Keeping your standard prices higher than trade value but low enough that customers stay interested is a major key to financial success for your small business.
For instance, if it costs you less than a dollar to make a cup of coffee for your customer but you sell it for $2.50, that price gives you a wide profit margin while still coming in lower than the competition.
Setting Fair Prices
The art of setting fair prices can help ensure your small business is here to stay. Begin by looking at costs in your wholesale price list but don't forget to add in other materials, labor and overhead. Consider the profit margin that is most desirable to you and yet accessible to your customer.
If you don't know where to start with pricing, check out how your competition prices their goods and services and go from there. You might be able to cut your expenses to offer a better price than them or include premium features they cannot offer to give a better value at the same price point.
- Price red image by Silke Wolff from Fotolia.com