Consider These Pricing Factors |
What is the best price for your products or
services? It isn't based on how many customers you have, how
many salespeople you employ, the standards in your industry - or even
what you've charged in the past.
The best price is the amount customers will pay that effectively earns
your company the maximum profit. It might be significantly higher than
what you're charging now!
To
help determine your optimum price tag, here are five critical C's of
pricing:
1. Cost. This is the most obvious component of pricing
decisions. You obviously cannot begin to price effectively until you
know your cost structure inside out. That includes both direct costs
and fully loaded costs, such as overhead, trade discounts and so on.
And it means knowing those cost structures for each item or service you
sell - not just on a company-wide or product-line basis. Too
often, managers make pricing decisions based on average cost of goods,
when in fact, huge margin variations exist from item to item.
Traditionally, businesses have priced their goods and services based on
their costs. But cost is often irrelevant in the buying decision of the
purchasers. They never even know the cost. Understanding this basic,
yet all important principle, is essential to determining the real
profit opportunities in your business.
Your company's gross margin potential is illustrated using the
following model:
Potential sales |
= |
Units
sold X customer's perceived value per unit |
Less cost of sales |
= |
Accurate
direct and indirect costs of products/ services sold |
Gross
margin potential |
= |
Dollars
left to pay all other expenses and generate profits
|
2. Customers.The
ultimate judge of whether your price delivers a superior value is the
customer. Are your customers willing to pay more than you're charging?
The information you need to know is:
What is your
customer's expected
range - the highest and lowest price points?
Within that range, what is your
customer's acceptable range - the highest or lowest he or she is
willing to pay?
When you consider pricing strategy, ask your
clientele for their input. Two simple questions: What do you think this
product or service is worth? Would you have bought it at another price?
3.
Channels of distribution. If you sell through "middle
men" to get to the end-users of your products or services, those
intermediaries affect your prices because you have to make their
margins large enough to motivate them. You must also consider the
expenses that intermediaries add. Make sure these third parties add
value to the relationship between you and your customers.
4.
Competition. This is where managers often make fatal
pricing decisions. Every company and every product has competition.
Even if your products or services are unique, make sure that you think
carefully about your competitors from the buyer's point of view (the
only opinion that matters). If you're not sure about how your customers
evaluate you in terms of alternatives, pick up the phone and ask a few.
5.
Compatibility. Pricing is not a stand-alone decision. It
must work in concert with everything else you're trying to achieve. Do
you believe a fast-food hamburger chain can sell $10 filet mignons? Is
your pricing approach compatible with your marketing objectives? With
your sales goals? With the image you want to project?
Those objectives have to be explicitly stated. For example, let's say
your production goal is to even out the process so you can better
control inventory. The last thing you want is a pricing strategy that
forces seasonal spikes in demand that result in stocking problems.
Before making a final decision on what to charge for your products and
services, examine these five critical C's of pricing. With the right
price, you'll generate enough fuel to power your business.
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