The Price is Right?

by Shaun R Smith on April 20, 2010

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Do you want to raise your prices, but fear your customers will leave you?  Do you want to steal more market share from your competitors?  Are you a service provider who can’t figure out if you’d be busier if you charged less, or if it would just cheapen your reputation and lower your profits?  You deliver a great service or have an amazing product that you want your market to buy and enjoy and benefit from – but you also want to be fairly paid for your troubles.

To set the perfect price for your products and services is part art, part skill.  There are three primary aspects you must factor in to determine price:

1. Your costs

2. The competitive landscape

3. Your value added

Cost plus pricing

The way many businesses price their goods or service is by marking them up by a certain amount. This is a very standard practice on retail for example. Let’s say your wholesale cost on a dress is $50 and you sell it for $100 – that’s a 100% or 2x markup.

While your costs give you the base line level for your pricing, there is more to consider than that. It is true you must know your costs to deliver your services or goods because you must always price above that point – or the more you sell, the more money you’ll lose!  In service businesses, where the price is fixed at the beginning of a project and the costs could vary as you deliver the project, it is very important to know your direct costs and to make sure you are pricing accordingly.

As I mentioned, cost plus isn’t enough.  What if your competitors are able to deliver the goods to the market at a much better cost to them – and therefore are able to price more aggressively. Or what if others in the market are willing to take less margin to gain market share and grow. Wal-Mart has used first the latter, then the former strategy to amazing effect over the last 50 years. They decided that they weren’t going to follow the standard markup practices in their industry with the hope that it would pay off in growth. Now that they are the market leader, their costs of products are much better than almost any other player in the market. If you were a retailer just using the standard 100% markup and ignoring Wal-Mart – you’d be in for a rude awakening.

The other perspective might be true for you. What if your goods have characteristics that allow you to price them at a higher price point than is standard in your industry.  You could be leaving money on the table if you just used a standard markup.

Competitive positioning

What are your competitors in the market charging for the same or similar product or service? Almost every company has competitors. If there isn’t a company delivering the exact product that you are, there is a substitute product or service in the market that people are consuming. What are people paying to fill the same want that you are trying to fill?

Once you thoroughly know your costs -and then map out your position in the market against your competitors – you are getting much clearer picture of where the right price would be for your company’s products and services.

Value Added Pricing

Next week, we’ll discuss the least objective of the three pricing factors – the elements of value added of your product or service in the market.


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