This may seem a strange question to ask a business owner but it is an important one to be able to answer.
For example, there is a world of difference between a service-based business and a manufacturing business, when it comes to how to approach pricing. And, it goes without saying, it’s essential to get the approach right.
We work with the owner of a service-based business, who charges are based on selling time – in other words, his time at his hourly rate and this rate is used to cover overheads, profit, tax etc.
However, he then set up a manufacturing business and soon found pricing was a very different concept. He was buying raw materials by weight and selling on his final product by volume. Unlike selling time, money is needed upfront to buy in supplies and any slightly variation in the unit cost for those raw materials makes a big difference to profits.
We carried out an analysis of the business, converting the costs per the accounts to get a per unit average cost price of the finished product. This revealed our client was overspending by £6 per unit – that equated to a significant £21,000 in lost profits, every quarter. This overspend accounted for only a very small percentage of total turnover.
Armed with this knowledge, we met with the client to discuss potential reasons how this could have occurred. One was because the process involved more wastage than had been anticipated and another was the delivery of raw materials being 10 per cent underweight each time.
By changing suppliers and increasing the quality of the raw materials purchased meant more accurate deliveries and less wastage produced.
At Optimum, we take the ‘tech’ side of the numbers and convert them into information business owners understand. We work with manufacturers as well as service providers and our goal is always to help our clients improve their businesses.
To talk to the team about helping your business, please get in touch. We support businesses in Swindon, Wiltshire, Cheltenham, Gloucestershire and the surrounding area.
