Am I Charging the Right Price?

Start with what “right” means

A price is too low when normal sales cannot cover the related costs and a fair share of business overhead. It may also be too low when demand is strong but the business lacks the people or capacity to serve customers properly. A price can be too high when customers do not see enough value, comparable alternatives cost less, or the quotation includes features they do not need.

There is rarely one perfect figure. A useful pricing decision normally combines four checks: cost, sustainable margin, customer value and the market. Cost gives you a floor to investigate. Value and market conditions indicate what customers may accept. Your capacity, payment terms and business strategy influence the final decision.

A realistic Malaysian SME example

Imagine a small Klang Valley service company quoting for a recurring monthly maintenance job. It expects 20 technician hours, materials, travel and occasional subcontractor support. The figures below are illustrative and exclude SST or other taxes that may apply to a particular business.

The RM1,000 contribution equals 33.3% of the selling price. It helps pay office rent, administration, software, management time and other shared overhead before any net profit remains. Whether RM3,000 is sufficient depends on the company’s total overhead, available capacity, service risk and the value of reliable maintenance to the customer.

Do not confuse margin with mark-up. Here, the RM1,000 profit contribution divided by RM3,000 sales is a 33.3% margin. Divided by RM2,000 cost, it is a 50% mark-up. Using “30%” without saying which one can produce the wrong quotation.

Know the full cost before negotiating

Begin with costs that arise because you accept the order: products or materials, productive labour, subcontractors, commission, packaging, delivery, payment charges, warranty work and expected wastage. For a job, record actual hours and materials against a job number so the next quotation is based on evidence rather than memory.

Then consider overhead. Rent, administrative salaries, accounting, insurance and software may not belong to one order, but your total contribution must cover them. Use the break-even guide to understand how much monthly contribution the business needs. If reliable costing is unavailable, first improve the records; a precise-looking price based on missing costs is still unreliable.

Check value and the market

Competitor prices are useful reference points, but they do not reveal the competitor’s costs, quality, capacity or strategy. Instead of copying a price, compare what is included: delivery time, warranty, response time, minimum order, credit period, technical support and the risk carried by each party.

Ask what problem the customer is solving. A fast repair that prevents costly downtime may create more value than routine work, while a standard item available from many suppliers may be price-sensitive. Speak to customers who accepted and rejected quotations. Record the reasons without assuming every lost order was caused by price.

Payment terms also matter. RM10,000 received immediately is not the same cash position as RM10,000 collected after 90 days. Late collection does not automatically make a customer unprofitable, but financing effort, collection work and credit risk should be reviewed when agreeing terms.

Test every discount before approving it

A discount reduces contribution faster than many owners expect. Suppose an item sells for RM100 and has RM70 attributable cost. Contribution is RM30. A 10% discount reduces the selling price to RM90, but the cost remains RM70, so contribution falls to RM20—a 33.3% reduction in contribution. The business would need 50% more units at RM20 contribution to earn the same total contribution as before, assuming capacity and costs remain unchanged.

A discount may still be sensible for a larger order, faster payment, lower delivery cost or unused capacity. Link it to a clear benefit and set approval limits. Avoid giving a permanent discount merely because a customer asks.

Practical pricing steps

1. Choose one product, service or job. Use a recent normal example rather than trying to rebuild every price at once.
2. Calculate attributable cost. Include materials, productive labour, delivery, commission, rework and other costs caused by the sale.
3. Set a contribution requirement. Check the contribution needed to cover monthly overhead and the desired return.
4. Compare value and alternatives. Document what the customer receives and what competing offers include.
5. Test changes. Calculate the ringgit effect of a discount, supplier increase, longer credit period or lower volume before approval.
6. Monitor the result. Compare the quoted cost with the actual cost and review prices when inputs, scope or capacity change.

Common mistakes

• Adding a percentage to purchase cost while ignoring labour, delivery, wastage or service time.
• Confusing mark-up with margin when preparing quotations.
• Copying a competitor without comparing scope, quality and payment terms.
• Keeping old prices after supplier, salary or exchange-rate-related costs have changed.
• Giving discounts without calculating the contribution lost or receiving something in return.
• Using one margin for products, customers or jobs with very different cost and service demands.
• Increasing every price automatically without considering customer value, demand and contractual obligations.

When professional help may be useful

Consider help from an accountant or financial management adviser when product costs are incomplete, jobs regularly exceed quoted hours, margins vary widely, or price changes could affect major contracts. They can help build a repeatable costing and profitability report, test scenarios and separate contribution from net profit.

For SST, income tax, competition law, contract terms or regulated pricing, obtain advice from an appropriately qualified tax or legal professional. This article is general education and does not determine the correct price or legal treatment for an individual business.