In this article, we shall initially focus on margins and mark-ups, two terms that are occasionally conflated despite their substantial differences.

A mark-up pertains to the amount, often expressed as a percentage, that is added to the cost of a product to arrive at its selling price. For instance, if a product is purchased at $50 and an additional $50 is added, resulting in a sale price of $100, the mark-up would be $50 or 100%, since the amount added is identical to the product's cost.

On the other hand, a gross margin pertains to the percentage of the sale price that remains once the cost has been subtracted. This is also expressed as a percentage. For example, if an item costs $70 and is sold for $100, the margin is 30%, which is derived by dividing the profit on the item by the sale price. This amount represents the profit earned on the sale, which can be used to cover expenses and generate additional profit.

The net margin, by contrast, is the percentage of total sales that remains after covering the cost of the products and all the expenses directly related to the sale. In other words, it represents the profit as a percentage of the total revenue earned.

The profit margin denotes the percentage of total sales that remains after settling the cost of sold products, the expenses incurred in directly selling them, and the operating expenses of the business.

Profit margin is 10% (i.e., $20,000/$200,000)

Breakeven refers to the volume of sales necessary to offset your operational expenses.

Profit refers to the monetary amount by which your revenue surpasses your expenses.

Prior to delving into topics such as adding value and discounting, it is imperative that you ensure that your products are appropriately priced to yield sufficient revenue to cover your expenses, repay loans and other liabilities, and acquire business assets while providing a fair profit. Neglecting this fundamental aspect could significantly decrease your likelihood of success.

The following charts illustrate the significant reduction in the likelihood of making a profit or obtaining a just reward for one's hard work.

It is essential to bear in mind that, as expenses fluctuate, you must periodically review your product pricing. One should not assume that once the pricing was correct, it will remain so indefinitely.

Assuming that your product costing is accurate and that you have covered all expenses and other outgoings, profit can be achieved. In most businesses, this is predicated on achieving a certain level of sales at a specific price. However, what happens when a competitor lowers their price? Should you lower yours automatically? And if so, how does it affect the aforementioned calculation? The answer is that it only serves to erode YOUR PROFIT!

It is easy to assume that a small reduction in price will have little impact on profit. Unfortunately, such assumptions are incorrect.

The first chart highlights the impact of discounting on the business's turnover. The percentage shown indicates the increase in turnover required to achieve the same level of profit (at various margins) after reducing prices.

If you present gross margin is:

The second chart shows how many sales you can afford to lose while still maintaining your current profit level if you put your prices up

If you present gross margin is:

These figures should be sufficient to dissuade one from the notion that lowering prices or engaging in discounting wars with competitors is a viable strategy for achieving business success. Rather, it would be more accurate to suggest that it is a path toward business hardship.

The question remains: how can one address the challenge of pricing and competition in the market?

When a business cannot distinguish itself from competitors on any other basis, customers often make purchase decisions based solely on price. However, if a product or service is perceived as more valuable, a higher price can be justified.

One way to increase prices is by adding value to products or services. The challenge is to determine how much added value is necessary to justify the higher price, and whether customers will be willing to pay for it.

A recent advertisement by an Australian barbeque company offers an excellent example of the power of added value. The company ran an ad in Sydney newspapers, offering customers who purchased a barbeque a free barbeque pack with meat, salads, and dessert for ten people, along with free home delivery of the bundle. Although the cost of the meat pack to the company was likely a fraction of the stated value, the added value made the company stand out from competitors who offered only the barbeque itself.

While the cost of the added value to the business must be taken into account, the added sales generated by the higher perceived value of the product or service can outweigh the added cost. In this case, even though the company incurred some cost for the barbeque pack, the added sales of barbeques would likely have far outweighed the cost.

Businesses should strive to creatively add value to their offerings in ways that appeal to their customers, making their products or services more attractive and justifying higher prices.

However, it is possible to add value without incurring additional costs. For instance, if you owned a barbecue company and wanted to offer value-added benefits to your customers, you could seek a partner to provide the complementary products. Suppose you thought that offering a barbecue pack would be an excellent idea. In that case, you could approach a local supermarket to sponsor the pack in exchange for promotion as the supplier, a mutually beneficial arrangement.

The supermarket would get an opportunity to showcase its products to potential customers who may re-purchase them later. The barbecue company, in turn, could add value at no extra cost. Another recent example is that of a bedroom furniture retailer who not only promoted an extensive range of products but also offered customers a bundle of value-added benefits such as a free top sheet, a free bottom sheet, a free set of pillowcases, removal of the old bed for free, and interest-free terms. Though there would be some cost to the retailer, the expense involved in providing a set of sheets and pillowcases would be at their cost price, which translates to significant savings for the customer when looking at it from a retail value perspective.

Do you believe that, in either of the aforementioned cases, the retailer could justify selling their product at a slightly higher price than their competitors, especially since they added so much extra value?

In advertising deals like these, the value attracts the attention of the purchaser. People love feeling like they are getting something for nothing and will often make a purchase based on this fact, even though they may have been able to find the primary product at a better price had they shopped around.

The best part is that adding value doesn't have to be expensive. Many businesses add value in subtle ways that are extremely meaningful to their clients. For instance, a food business that offers recipes and food preparation booklets to its clients, a shoe retailer who includes shoe care kits, printers who offer business clients books of tips for getting more business, travel agents who add in travel insurance, car hire, free nights' accommodation, a good sporting retailer who offers 12 months of free service on the bikes they sell, or a motor vehicle retailer who provides a free advanced driving course. The list is endless.

To find out what adds the most value for your customers, consider what other things they may need or find appealing after purchasing your product. Look at the services your customers may require. For example, if you sell cosmetics, you may offer hairdressing services, image consulting services, manicures, dressmaking, and so on.

Finally, consider value add-ons to your product or service. For example, in the carpet cleaning business, you could offer books on stain removal, attractive coffee table books, floral arrangements, room fresheners, attractive prints, a guide to home care hints, calendars, fabric protection sprays, welcome mats, and so on. The possibilities are endless if you put your mind to it.

Keep in mind that your customers are seeking a resolution to their predicaments. Frequently, as long as they feel they are obtaining value, price becomes a less significant concern. It is possible that you are spending more time fretting about pricing than your customers are.

The disadvantage is that some customers will always prioritise price when making purchases. They will perpetually seek discounts, and they will most likely not return to your business.

The advantage is that the majority of customers will appreciate that you provide value (not just products or services), and as a result, you will have gained their patronage and loyalty.