We Know: How to Price A Product

Pricing Your Products and Services

There are several pricing strategies. Select the approach that will make your goods or services the most competitive and will help you reach your profit goals.

1. Retail Cost and Pricing
A common pricing practice among small businesses is to follow the manufacturer's suggested retail price. The suggested retail price is easy to use, but it doesn't adequately account for the element of competition.

2. Pricing Below Competition
This strategy reduces the profit margin per sale. It requires you to reduce your costs and -

obtain the best prices possible for raw materials or inventory
locate the business in an inexpensive area or facility
closely control inventory
limit product lines to fast-moving items
design advertising to concentrate on price specials
limit non-essential services

One word of caution: pricing goods below the competition can be difficult to sustain because every cost component must be constantly monitored and adjusted. It also exposes you to pricing wars. A competitor can match the lower price, leaving you out in the cold.

3. Pricing Above Competition
This strategy is possible when price is not the customer's greatest concern. Factors important enough for customers to justify paying higher prices include -

service considerations, including delivery, speed of service, satisfaction in handling customer complaints, knowledge of product or service, and helpful, friendly employees
a convenient or exclusive location
exclusive merchandise

4. Price Lining
This strategy targets a precise segment of the buying public by carrying products in a specific price range only. For example, a store may wish to attract customers willing to pay more than $50 for a purse. Price lining has certain advantages:

ease of selection for customers
reduced inventory and storage costs.

5. Multiple Pricing
This approach involves selling a number of units for a single price, for example, two items for $1.98. This is useful for low-cost consumer products, such as shampoo or toothpaste. Many stores find this an attractive pricing strategy for sales and year-end clearances.

Cost Factors and Pricing

Every component of a service or product has a different, specific cost. Many small businesses fail to analyze each component of their commodity's total cost, and therefore fail to price profitably. Once you do this analysis, set your prices to maximize profits and eliminate any unprofitable services.

Cost components include material, labor and overhead costs. Material costs are the costs of all materials found in the final product, such as the wood, glue and coverings used in manufacturing a chair.

Labor costs are the costs of the work that goes into manufacturing a product. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel hours needed to complete the job.
Overhead costs are those not readily identifiable with a particular product. These costs include indirect materials, such as supplies, heat and light, depreciation, taxes, rent, advertising, transportation and insurance.