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The Price is Right or Is It? - Sep 14, 2008

Posted by: Rick Arthur in Articles

"The Price is Right" television show has survived for years by giving people a chance to guess the right price for merchandise and services. Many business owners still play this game, but with much higher stakes. How do you set the prices for the products or services you sell? Do you rely on a fixed-price markup from your cost or on a gut feel? If your pricing strategy is based on either of these tactics, you may be losing money or losing customers.

The three most popular approaches -- in order of their use by entrepreneurs -- are cost-based, market-related and competition-driven pricing. Frankly, any wise entrepreneur should take into account all three techniques before publishing prices.

Cost-based Pricing

Costs plus a reasonable profit
Clear understanding of all your costs
Labor, materials, direct overhead and indirect costs
Estimated volume of sales to allocate costs
Fixed and variable costs
Product "break-even point"

Market-based Pricing

Markets tolerance for your price
Price sensitivity - wholesale vs. retail
Value of "sizzle"
Supply and demand

Competition-driven Pricing

One-of-a-kind products
Understanding your distinct advantage
Consider "introductory" low-price offer

"Right pricing" is the art of choosing the best price for your inventory. It requires information, facts, analysis and a tailored strategy before you establish your pricing policy. At a minimum, your pricing policy should take into consideration the following:

Your true product costs
Market supply and demand
Anticipated sales volume
Competitors' prices
Economic conditions
Business location (retail)
Seasonal fluctuations
Customer psychological factors
Credit terms and purchase discounts
Customer price sensitivity
Desired business image
Market share

The biggest mistake small businesses make concerning pricing is not reassessing pricing on a regular basis. The marketplace is constantly changing making it mandatory you keep a close watch on your pricing. Raise or lower prices as necessary keeping the above suggestions in mind.

In order to ease the pain of your customer when increasing prices, you may want to consider the following:

Notify your existing customers of the increase and, if possible, give themthe opportunity to purchase at the existing prices
Try and advertise the increase along with "new and improved" products or services
Give the customer something in return for the increased costs. For example, free shipping with orders above a certain value
If possible, delay the increase for existing customers

Successful businesses develop pricing strategies along with written policies and procedures to insure they meet their projected sales revenue and margins. Are you a winner at "The Price is Right"?