YOUR BUSINESS ... PRICING FOR PROFIT

One of the essential decisions for any business ‑ but especially for new businesses ‑ is the price of your product or service.  

Before the pricing decision can be made, it is essential to do some research:

1) What is the competition doing, and what is their market position ‑ premium, top of the line; or high volume / low mark‑up? 

2) Where do you wish to position your business, product line, or service? 

3) Determine the following for each of your products or services:  Fixed costs (rent, utilities, salaries, etc) and Variable Costs (selling expenses, cost of production).  Both have different effects on your pricing (and profit).  Some new companies make the mistake of only pricing to cover variable costs, plus a small profit, and forget that over time the fixed costs are equally important.

Many of us have heard the phrase "fair price", usually in connection with the mark‑up over wholesale cost.  THERE IS NO SUCH THING AS A "FAIR PRICE".  Price is merely the economic value that customers place on your product or service, and has nothing to do with your cost.  (If the price you need to charge is under your costs, then your customers do not place the same value on your product as you do, and maybe you should not be in that business).

Three Examples: 

1) Perfume ‑ do you think that the cost has any relationship to the retail price of $20.00 or more per once?  The price is more a factor of perceived image than manufacturing cost. 

2) "Fortune Magazine" ‑ first published in the Depression when typical newsstand prices were 20 cents per issue.  Through an error, the first issue was priced at $2.00!  Customers thought: "If it costs that much, it has to be good".  It never had to lower its price. BUT the managers and editors reacted positively, thinking “if it's priced that high, we'd better make it worthwhile to our readers”!

3) Computer software can be priced to recover development cost, plus the cost of distribution, plus a profit (which creates a very small profit and discourages competition) OR it can be priced in proportion to the savings received versus doing the same task by manual methods (a much larger initial profit margin, until competitors begin to arise!).

            Therefore if you are in a situation where you have initial pricing flexibility, you can choose any price you wish, so long as the customer also receives value for what they are receiving.  Every business transaction should be win:win for both customer and supplier.  If you are unsure what customers will pay for your product or service, you can find out price sensitivity by picking two widely separated geographic markets and advertise at different prices.  

Ralph Helwig is President of Economic Strategies, Ltd., a consulting firm established in 1983 which specializes in assisting entrepreneurs in starting and financing businesses (www.econstrategies.com).