Pricing Your Product or Service
Pricing is an art and a science. The art is market strategy, the science is cash flow. This section is about pricing deals with market strategy, the art of recognizing that price is not a personal issue, a lower price is not always better, and that the marketplace will help you determine the highest price the market can bear.
What Should You Consider When Pricing Your Products or Services?
Pricing is an art and a science. The art is market strategy, the science is cash flow. This section is on pricing deals with market strategy, the art of recognizing that price is not a personal issue, a lower price is not always better, and that the marketplace will help you determine the highest price the market can bear.
Five market strategies concerning pricing include:
A lower price is not always better. Customers often associate price with quality. Have you ever found yourself buying a higher priced product because you assumed it was better? Most people, if they are honest, will answer yes to this question. Depending on the quality of your product, the desired image of your company, and the other services you offer, sell the value of your business rather than the price of your product.
Use your strengths as your competitive advantage to sway customers to buy from you instead of someone else. You operate in a competitive market. Comparison shopping does exist. Price is not the only criteria evaluated by customers. You evaluated your competition on a number of other considerations including, but not limited to:
Quality
Availability
Expertise
Service after the sale
Image
Convenience
Remember when you compared yourself to the competition? Educate your customers about your strengths. Again, sell the value of your business rather than the price of your product.
3.Customers, depending on who they are and what you sell, may have a limited ability to pay for your products or services. Generally, people will price-shop for things they need. When people are filling their wants, they are willing to pay for value. If you have a truly wonderful product or service, but your customers cannot afford it, you will have a difficult time selling regardless of the benefits your business offers.
4.Price can be used to control the supply and demand of your products and services. If you find your business unable to keep up with customer orders, your image or reputation could suffer because you are not responding fast enough to meet your customers wants and needs. Your solution could be raising prices. As price increases, demand will decrease.
5. Price testing is critical. When offering new products or services, price them differently in different segments of the marketplace and measure the impact on sales. Keep adjusting your price until your customer orders are at a level you can handle.
The following chart depicts typical pricing formulas and outlines all the costs you should consider.
BASIC PRICING AND FORMULA
Increases with each distribution link
What Are Variable Costs?
Variable costs are directly tied to the sale of your product. These costs include things such as the direct labor to make your product, parts, raw materials and packaging. If you did not sell or make your product, you would have no variable costs.
What Are Fixed Costs?
Fixed costs are committed costs. If you commit to having a business, you will commit to these costs whetheror not you sell your product. These costs include rent, utilities, office supplies, advertising and travel. Sometimes these costs are referred to as the costs of doing business. They also include what you have identified as your need for take-home pay, owner draw. Your owner draw must be covered or it is not worth your time and effort to operate your business – and you will not have enough money to take care of your personal needs.
What Are Value Costs?
There are two types of value costs, yours and your customers’. Yours is the value you should receive from operating your business – you deserve to profit from operating your business. The second is the value your customers perceive in doing business with your company. Remember, you may charge an additional price for added value such as convenience, warranties, location, expertise, quality, and other services.
Consider all the pricing components when setting your price. If you do not, your business will simply lose money. Again, the basic definition of marketing is “Meeting a customer need or want at a profit.” You have already gathered some of your costs, but you will pull them all together when you start your business financial planning.