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The Price Is Right Or Is It

Sep 14, 2008

 "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"?

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