Your Pricing Strategy Affects Trade Receivables Financing

If you’re in need of some quick cash infusion for your own business, you may want to think about accounts receivable factoring instead of applying for a bank loan. Factoring is a form of trade receivables financing. You get an advance on the value of your invoices, which you can then use right away as working capital. Small business factoring companies can offer you as much as 80% of the value of an invoice, and then charge you a very small percentage as fee for the advance.

Since your funding relies on the value of your accounts receivable, you really need to make sure that you’re pricing your products and services correctly. But how do you determine the right price for goods and services? Here are some pricing strategies you may want to think about.

Cost-Based Pricing

In any business, you earn money when you receive more money than what you spend. This is also the very essence of cost-based pricing. You take note of how much you spend in manufacturing a product or providing a service, and then you add a nice profit margin for yourself when you set a price for what you offer.

The key here is to be very aware of how much you actually spend on costs. Maybe you spent money on research and development. You also have to take note of various ordinary expenses such as rent and utilities, as well as supplies and equipment you need for your work. Payroll has to be considered too. Even after you’ve manufactured your product, you will also have to consider just how much money you will spend on advertising to promote that product.

This is a great way to price things—if you offer a product or service that the consumer base wants.

Competition-Based or Industry Standard Pricing

Here you look at the prices normally charged by your competitors and then you determine your own prices based on those figures. Normally this means you price your products lower so that you can brag that you offer more affordable goods and products. This is actually a very easy way to get the attention of many prospective consumers.

The problem here is that you still need to think about your own costs so you don’t end up losing for each sale. If you’re spending a total of $1,000 to create a single doodad, then offering it for $9o0 means you’re selling it at a loss. Some large corporations can absorb this kind of loss because they just want to grab market share and make a brand more popular, but for a small business this can be a problem.

Customer-Based Pricing

When there’s a great demand for a product, you can raise prices in order to gain more profit. There may even be a boost in your brand’s image. Many people see the price tag as proof of quality. If they see that something is expensive, then they automatically think that it must be good. Many exclusive universities set their tuition this way, as a way to discourage more than 75% of their applicants. Luxury bags use this type of pricing too.

Whatever pricing strategy you use, just keep in mind that it will affect your trade receivables financing as well!

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Chris Lanchech

Hi everyone, my name is Chris and I am a junior analyst at Neebo Capital and an inspiring blogger. We enjoy speaking with business owners and entrepreneurs who come to Neebo Capital looking for cash flow solutions.

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