YOUR BUSINESS ... PRICING
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
What is the competition doing, and what is their market position ‑
premium, top of the line; or high volume / low mark‑up?
Where do you wish to position your business, product line, or service?
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
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).
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.
"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”!
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
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).
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