Where Does Your Profit Margin Put You in the Market?

Posted by Natalia Atapina on Sep 24, 2015 9:42:48 AM

In Profit, profit margin

This information is designed to give you insight into why it is important to decide where you want to be positioned in your market. This positioning happens through your pricing policy. You’ll find out what establishing pricing policy involves for your business and what it could mean to your future.

Your pricing policy options
When it comes to price, it’s important to position yourself in the market. To do that, you have several options. These options are created by the critical mix of your profit margins and your desired sales volumes.

1. Low margin / high volume
In this instance, your products and services have a low profit margin. The idea being that you sell a higher volume of products or services at this lower margin than you would have otherwise. The higher volume of sales compensates you for the lower profit margin.
This places your products or services at the cheaper end of the market. Yours might be considered a ‘budget’ purchase within your market.
Bargain basement clothing or variety superstores tend to operate on this premise. For example, department stores offering 20% off all prices on a certain day of the year or on a certain range of products are working on this premise. By dropping the margin, their target market—bargain shoppers—come running and buy big! This means that the company still makes a healthy profit based on the volume sold rather than the margins themselves.

2. High margin / low volume
Here, your products and services have a high profit margin with a low volume of sales. Obviously, the reverse is true in this case. This means the company still makes a healthy profit based on the margin rather than the volume itself. The high margin compensates the business for the low volume.
This places your products or services at the more expensive or upmarket end of the scale and will appeal to non-price-conscious buyers, of which there are many.

3. Low margin / low volume
This is not something you want to choose for your business! This means that your products and services are not overly profitable AND that you don’t sell a high volume either! This option is to be avoided as your business will not grow easily or be profitable.

4. High margin / high volume
And finally, the ideal option. In this case, you get the best of both worlds—high margins and a high-demand products that sell in high volume. What could be better?

Options 1, 2, and 4 have merits based on your business, your products and services, and your desired position in the marketplace.

Contact Tradies Accountant today for more information.