Most small businesses price by looking at the competition and the purchase rate. If the dealer down the road sells a CP tap at ₹900, you sell it at ₹890. That keeps you in the market. It says nothing about the money you make on each sale.
Good pricing starts with knowing your real cost, then deciding what margin you need, and only then looking at the market.
01Step 1: work out the full cost
The purchase rate is only part of the cost. For a trader, add:
- Freight inward
- and loading
- Breakage and shortages
- in transit
- Supplier discounts and schemes
- you receive (subtract these)
- Cost of credit,
- if you pay the supplier before your customer pays you
For a manufacturer, cost per unit includes:
- Raw materials,
- with wastage
- Labour
- directly on the product
- Power and fuel,
- often large in ceramics, forging and plastics
- Job work
- charges
- Packing
- A share of factory overheads
- rent, maintenance, supervision
An example
A Rajkot pump maker's cost for a 1 HP monoblock pump:
| Cost item | Per pump |
|---|---|
| Castings and stampings | ₹1,850 |
| Copper winding wire | ₹1,120 |
| Bearings, seals, fasteners | ₹380 |
| Labour | ₹420 |
| Power | ₹160 |
| Painting and packing | ₹140 |
| Share of overheads | ₹530 |
| Total cost | ₹4,600 |
GST paid on inputs is not part of the cost if you claim input tax credit, so leave it out. Work in amounts before GST throughout.
02Step 2: decide the margin
Margin is the share of the selling price that is left after cost. If the pump sells at ₹5,750 before GST, the margin is ₹1,150, which is 20 percent of the selling price.
The margin has to cover your expenses outside the product cost, such as office staff, sales, interest and rent, and still leave a profit. A business whose fixed costs are 12 percent of sales needs a margin well above 12 percent before it makes anything.
Typical gross margins vary widely by trade. Grocery retail runs thin, often in single digits. Branded garments, furniture and specialised spares run much higher. Look at your own profit and loss to see what your business has made. See reading a profit and loss statement.
03Step 3: set the price
Price = cost ÷ (1 - margin)For a 20 percent margin on ₹4,600: ₹4,600 ÷ 0.80 = ₹5,750.
Note this is different from adding 20 percent to cost. ₹4,600 plus 20 percent is ₹5,520, which gives a margin of only 16.7 percent. This mix-up is the most common pricing mistake in small business. See markup and margin.
04Step 4: check the market
Now compare with competitors. If the market price is ₹5,400 and your cost is ₹4,600, your margin at market price is only 14.8 percent. Your choices are:
- Reduce cost
- cheaper castings, less wastage, better power use.
- Justify a higher price
- better build, longer warranty, faster service.
- Accept a lower margin
- on this product and make it up elsewhere.
- Stop selling it,
- if it cannot make money.
05GST and the price
Quote business customers a price plus GST, so the tax is clear. For retail customers, prices are usually shown including GST, and the MRP on packaged goods includes all taxes.
Say an item is priced at ₹5,750 plus GST at 18 percent. The customer pays ₹6,785. If you set a retail price of ₹6,785 including GST, your price before tax is ₹6,785 ÷ 1.18 = ₹5,750. Always calculate margin on the price before GST, since the GST is not your money.
06Discounts and schemes
Every discount comes straight out of margin. On the pump with a 20 percent margin, a 5 percent dealer discount cuts the margin from ₹1,150 to ₹862.50, a fall of a quarter.
- Set a discount limit
- for each salesperson.
- Give schemes for a reason,
- such as clearing slow stock or winning a new dealer.
- Check what schemes cost
- at the end of each season, against the extra sales.
07Review prices regularly
Costs move. Copper, steel, cotton, diesel and power tariffs change, and a price set last year may no longer make money. Review prices:
- When a major input cost changes
- by more than about 5 percent
- At least twice a year
- for all products
- When you change suppliers
- or production methods
Tell dealers about price changes in writing with a date, so there are no disputes on orders in progress.
08Price for the customer as well as the cost
Different customers can carry different prices. A dealer who buys in full cartons, pays in 15 days and needs no delivery costs you less to serve than a contractor who wants small lots, delivery to site and 60 days of credit. Many businesses keep two or three price lists, such as retail, dealer and project, and decide in advance which customers get which list.
Watch the cost of credit when pricing for slow payers. At 12 percent interest a year, 60 extra days of credit on a ₹1,00,000 order costs about ₹2,000, which on a 10 percent margin is a fifth of the profit.
09For services
A CA firm or a design studio prices on time. Work out a cost per hour for each person, including salary, rent share and software, then price jobs on the hours they take plus a margin. Track actual hours against quoted hours on every job, so you learn which jobs make money.
In MatruOS, each invoice carries the item rate, HSN and GST rate, so the price before tax and the tax are shown separately on every bill.