Pricing is a challenge because it must represent your cost of production as well as meet your customer’s value for your product or service. Typically, a business will set a selling price on either a value based or a cost plus based system. Market conditions dictate, which approach, is used. For example, to use a value based approach you need to set the selling price at a level the consumer is welling to pay because the product or service meets their needs (it has value). A value based method is practical in highly competitive situations since the customer has alternative suppliers of comparable services or products, while the costs of providing such a service or product various. The cost based approach is generally used when your competitors are operating from the same costs of production and the pricing is highly competitive.
Calculate Your Costs
Finding the costs to provide your product or service is a critical first step. The process includes identifying your production costs; this includes fixed and variable outlays involved to offer your product or service. Rent, salaries, property taxes, insurance and any other expenses that remain constant are considered fixed costs, while variable costs include those expenditures that fluctuate with the number of products produced or services offered, and, may include raw resources, hourly wages, sales commissions, and other related costs. Generally, you would add up all of these various expenses to determine your product or service cost per unit sold. Next, you will want to establish the markup value of your product or service. This will require research and discussions with a number of people in your industry, trade, and community; your objective is to determine a competitive percentage of markup. Of course, a number of factors will play into the percentage of markup that you establish, and, even then, you will vary your price on occasion to meet the marketing needs you encounter.
A Competitive Edge
The most critical questions to be answered in establishing a selling price are your competition and the price you pay to produce the product or service you offer to consumers. Your competitive edge is always driven by the purchase price you paid to offer a service or product. In today’s world, this can mean other local venders, but, just as likely, it can mean large multi-state or even international companies, such companies have the ability to buy larger quantities of products or offer a wider range of services, thus, the potential to offer a lower price. In this case, you may have to adopt a market strategy that involves business practices that attracts customers for other reasons than price alone. This means to remain competitive you may need to depend more on service, location, or other strategies.Remember, you can set different prices for different customers to take advantage of higher profit margins when possible and, alternatively, seek higher volumes when lower prices justify market penetration.
The point is remain flexible in your pricing policies by taking advantage of the uncertainties in the business cycles, stay alert to your consumers’ values of your business as well as your competitors. The guiding principle in setting prices is to focus on the amount of gross profit produced by the volume of sales in relation to operating costs. Thus, know your operating costs to measure your survivability in pricing your product or service, be aware of your customers’ needs, and be watchful of market trends to avoid any adverse changes that might affect your business.