Pocket Price is the price from which all discounts, retro payments, coupons etc, that are offered to the buyer, are deducted.
The pocket price is used to determine a product’s profitability after things like discounts, rebates, and promotion. It’s calculated by subtracting the cost of such discounts, free freight, and similar offers from the list price of a product.
What makes the pocket price so important is its critical role in creating discounts and promotions that’ll work. Without knowing the pocket price, you can’t tell for sure if you’ll be making money with a specific promotion. Calculating this will help you create discounts that are attractive to your customers and profitable for your business.
To get the actual profit of a product, you need to subtract its total cost from the list price as well. For example, if you have a product with a $100 list price that has discounts with a total of $20, the pocket price of that product will be the list price ($100) minus the discounts ($20), which is $80.
To know the actual profit that this product yields, you must subtract the cost of making that product from the pocket price. If the hypothetical product we’re talking about costs $50, then you make $30 from each unit you sell. If you run a business that sells many products, understanding this calculation is essential to keeping eye on your profit margins.
Calculating the pocket price is a great way to size up the discounts that you’re giving to your customers. There are, however, a few things that you should consider to make the most out of this technique.
The following are the most important considerations.
Analyzing your pocket price gives you lots of valuable insights
Unlike what many people think, analyzing your pocket price can give you valuable insights about other things. Doing this analysis can give you valuable insights about your most profitable products and how to maximize these profits.
The bigger your business, the more important this analysis becomes. If you do this on a regular basis, you’ll be able to make tweaks to your pricing strategy which will bring in additional thousands -or even millions- in revenues, depending on the size of your business.
One thing you should remember when doing a pocket price analysis is that it must be done frequently. There are many variables in the business world and analyzing your prices regularly will help you stay on top of things and maximize your profits.
The pocket pricing concept has different variations
Pocket pricing is a concept that’s applied in different ways, with the most widely used variation being the pocket price waterfall method. The waterfall analysis method allows you to find the stage in every business transaction in which you’re losing money, which allows you to constantly improve your process.
To be able to use the pocket pricing method successfully, you must choose a variation that’s right for your business. Different variations allow you to identify points of weakness in your process. Before you choose, you should have a clear idea of what you’re trying to do.
If you don’t do that, you can end up spending lots of time and dedicating resources to an analysis that won’t give you the outcome you’re after. Identifying your most profitable clients, leveraging your pricing strategies and evaluating your discounts are some of the things that are possible with a pocket price analysis.
Pocket Price: Advantages and Disadvantages
The following are the main advantage and disadvantage that are associated with the pocket price technique. Knowing these will help you decide whether it’s right for your business or not.
Helps you lower discounts-associated risks
There are many risks that are associated with discounts. When done properly, discounts can help you sell more merchandise, win new customers and make more money. When not done properly, however, they can quickly run your business into the ground.
The major advantage of the pocket pricing technique is that it helps you evaluate your discounts to make sure they’re profitable and sustainable. Since numbers don’t lie, you can be sure you’re doing the right thing with your discounts when you conduct a proper analysis.
Usually distracts people from other factors affecting their pricing effectiveness
The problem that’s usually associated with a pocket price analysis is that business owners focus on them way too much. It’s true that knowing the pocket price of your products will help you figure out exactly how much money you make out of them, even when you’re having a discount.
There are, however, other factors that affect your profitability and how effective your discounts and pricing. Focusing on these numbers solely without considering these other factors can undermine improvement efforts.
How can Sniffie help?
To make the most out of your pocket price, you need to analyze the products of your competitors as well. Knowing the prices your competitors are setting for their products will help you know where you stand compared to them.
Instead of doing all of this extensive research manually, you can use a tool like Sniffie to save lots of time and effort. Check out Sniffie’s features and our service page to find out how it can make this process easier.
Want to learn more about pricing?
Are you keen to learn more about pricing? Head to our Pricing Academy, from there you can find our latest articles about pricing and other free resources related to pricing, be sure to check them out!
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