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Great Ideas for Your Business...
Would you like a pricing system which guarantees
you will make a desired level of profit over a year?
Let's assume you want to make 10% profit on your
annual turnover. Further, let's assume you have average overheads (labour,
power, rent etc) of 50% of turnover. The wholesale value of the flowers that you
should put into (eg) a $40 bowl arrangement can be calculated by;
|
Cost Component |
Percent of Bowl Price |
$ share of bowl price |
|
Selling Price of bowl |
|
40 |
|
Required Profit |
10% |
4 |
|
+ contribution to Overheads |
50% |
20 |
|
+ accessories (bowl, oasis, ribbon etc) |
|
3 |
|
gives total non-flower costs |
|
27 |
|
which subtracted from the selling price
gives maximum wholesale value of flowers to go in bowl |
|
13 |
Therefore, to achieve a 10% profit with your
present overhead costs, you should not use more than $13 wholesale of flowers
and greens. Taking a different approach, this is a ( $40 bowl divided by $13
flower component gives ) 3 times mark-up.
Under this system, you would put in more flowers
when they are cheap and less when expensive ( or temporally increase your
selling price).
Of course, if you get left with a wholesale
flower value that is obviously too low to give value for money, you will have to
reduce business costs and/or increase sales volume to achieve the profit level
you require. If you can't do either of these, you are going to go out the back
door!
You can work out your own overheads from your
annual accounts (divide the total of all costs except flowers and accessories by
the turnover and multiply by 100 to convert to percentage) or use the figure of
45% which is the average obtained from a survey of Australian florists conducted
by Petals.
For convenience, the value of flowers for several
selling prices and overhead costs is given in the following table.
|
Selling Price |
Overhead % + Profit Margin% |
|
50 |
55 |
60 |
65 |
|
10 |
5.00 |
4.50 |
4.00 |
3.50 |
|
15 |
7.50 |
6.75 |
6.00 |
5.25 |
|
20 |
10.00 |
9.00 |
8.00 |
7.00 |
|
25 |
12.50 |
11.25 |
10.00 |
8.75 |
|
30 |
15.00 |
13.50 |
12.00 |
10.50 |
|
35 |
17.50 |
15.75 |
14.00 |
12.25 |
|
40 |
20.00 |
18.00 |
16.00 |
14.00 |
|
45 |
22.50 |
20.25 |
18.00 |
15.75 |
|
50 |
25.00 |
22.50 |
20.00 |
17.50 |
As an example of how to use this table, consider
a bowl priced at $50. Assume your overheads are 55% and you want to make a
profit of 10% of turnover giving you a total of 65%. Look down the 65% column
and across the $50 row to find $17.50. Subtract from this the cost of the floral
accessories to be used in the order (bowl, oasis, ribbon etc -say $3.00) leaving
$14.50 wholesale value of flowers that you can afford to use in this order and
still make a 10% net profit. For practice, look up a $40 bowl with 45% overheads
and 15% profit and see if you get $16 in the table.
When choosing a pricing system, remember that you
can sell more and more and still go bust if your pricing formula is incorrect. A
simple mark-up strategy or, even worse, charging what the market will bear, can
be a short road to ruin.
|
Sale
Discount
|
Present Gross Profit Margin |
| 15% |
20% |
25% |
30% |
35% |
40% |
| 5% |
50 |
33.3 |
25 |
20 |
16.7 |
14.3 |
| 10% |
200 |
100 |
66.7 |
50 |
40 |
33.3 |
| 20% |
|
|
400 |
200 |
113.3 |
100 |
This table will demonstrate how price reductions
will effect your profit. To find the percentage increase in unit sales that you
will need to earn the same gross profits when you reduce a price, look under
your "Present Gross Profit" and across to the discount %. So. if
your present gross profit is 25% and you discount your baskets by 20% you will
have to sell 400% more than normal to get the same returns! So, think carefully
before you discount!
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