Follow these suggestions for better
pricing decisions
The prices you set for your
products and services affect every aspect of your business, including long-term
viability, short-term profits, market share, and customer loyalty. While the
guidebook or financial guru who can provide the perfect answer to this
important decision doesn't exist, tried-and-true principles can help. Here are
three suggestions to arrive at reasonable pricing for your market and industry.
Cover costs. The price you charge for a particular product must at
least equal the cost of producing that product. Depending on your industry,
production costs might include raw materials, storage, salaries, advertising,
delivery, rent, equipment, taxes, and insurance. Some of these will be
categorized on your income statement as "cost of goods sold." Others
will be overhead. Some, such as rent and utilities, are relatively fixed.
Others are variable, such as shipping and stocking fees. Adding the amount of
profit you want to earn as a percentage (called the cost-plus pricing method)
is one way to arrive at an appropriate price.
Know your market. Some businesses hire research firms to develop
detailed reports on competitors, markets, and forecasts for a particular region
or industry. But you may be able to get a handle on your market by using
surveys and other methods of ferreting out customer perceptions about your
product and service quality, the effectiveness of your advertising, and the
reasonableness of your prices as compared to your competition.
Monitor regularly. Product pricing is not a one-time event.
Instead, you'll want to monitor the impact of price fluctuations on sales
revenue over time. Overpricing – charging more than a reasonable buyer can be
expected to pay – may limit sales. Underpricing may create the perception of
poor quality or lead to unsustainably low profit margins.
Contact us for more tips and
techniques that can help you manage your company profitably.
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