The anatomy of a price

Yes I realize perhaps a curious title but still a subject that have baffled many a consumer over the years. We have all experienced the disappointment of buying a product or service, only to find it much cheaper elsewhere.

Only yesterday I found out to my amazement that in South Africa my current book is selling at prices that range from a very affordable R250.00 ($35.00) to a wildly over priced R536.00 ($76.00). To further the the fact that the higher price is simple daylight robbery, the book sells for a mere $24.00 in the US and £14.00 in the UK.

Here is the evidence:

Kalahari.net (lowest)

Loot.co.za

Exclusive books -- at a price that may be a bit to exclusive

As small business owners, deciding on a price for our products is a risky business. We don't want to under charge - as this may mean little or no profit -- and of course we don't want to over charge as this may result in fewer sales. So how should you determine a price.

Herewith a few ideas that have worked for many of my clients.

Step 1 - Do your homework

You cannot determine prices based only on costs and desired profit margins. First step is to do a little research to get some "real world" pricing guidelines. You don't need a high priced marketing firm to help. Remember, you know your business better than any consultant. Refer to the micro module on Market Research or follow the following pointers on finding out what your competitors and other businesses are doing regarding price. Once again there is no substitute for getting out into the field and doing the research yourself.

Locate a trade association, organization or networking group whose specialty is your service. If none exists, find an association with a similar product. In general, associations can tell you the high-low and average prices charged by members. You can find some organizations listed at our Free for all links or at any local business advice center.

Trade/Business Journals and newspapers contain articles that may include prices. At least once a year, I see an article about my industry online or in a periodical that contains industry fees.

Ask your accountant or Coach for some ideas; after all, they deal with business owners all the time.

There are many career and employee guides that provide industry or job related prices. Consult any industry specific control or accreditation body.

Obtain the cost of raw materials and supplies necessary for your product. Surely you want to charge more than it's costing you for the items!

Many business owners place a pricing structure on their websites. Using the industry name, plus the word "rate" or "fees", you can find those sites on the Internet.

Determine your hourly rate. What is your time worth?

Call similar businesses, outside your local area, for their prices. If you're not their competition, you have a better chance to be told the score.

Visit stores that sell the product you're interested in selling to determine their pricing system.

Ask everyone you know "if" and "what" they will pay for "x". Ask prospective clients what they would pay for your product or service.

With this information and your own costs you can determine where you set your own pricing and still be competitive.

Price carefully. You might not be able to compete on price only but remember your advantages as a small business and emphasize your "quick service" or "outstanding customer service." You may be able to price higher and still win customers within your market niche.


Step 2 - Determine Your Pricing Objective - What do you hope to achieve?

There are 3 ways to find the appropriate level for you and your product.

Base Price -- The lowest price or rate you must charge to cover your cost including, cost of living and keeping your knowledge and skills up to date.

Base Price is one of your pricing objectives. It's a very important one. This is the one figure you need know so you can keep your doors open. This is your break even point. The absolute minimum needed.
Chargeable Time is the maximum number of working days/hours in a given year. This is the one figure most business owners never consider. It is the number one reason why you end up working long hours and long weeks for your business.
Now divide your cost or Base Price by the number of days from your chargeable time figure. This gives you your daily income benchmark. The amount you need to be making per day from your products or service rates.

Be careful about lowering prices just to meet or beat the competition. There are, however, some good reasons to lower prices:
A strategy to increase market share.
Promote a new product or service.
Attract attention to a over stocked product.
Encourage high volume purchases.
Increase seasonal business (Christmas sale, etc)

Realistic Price -- Substantially higher than Base Price. Top of the quality range in your field but still competitive while offering good value and service to your customers.

Sometimes you have to increase prices in order to cover, for example, increased cost of materials, labor, etc. When an increase is necessary ease the pain for your customers by considering the following:
Notify your existing customers of the increase and, if possible, give them an 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.

Premium Price -- You position your product for the "elite group" and go after the client who wants and can afford the best.
Daily Income Benchmark -- How Much Per Day You Need To Make.
How do you determine daily amount? You need two figures... Base Price and Chargeable Time.

Step 3 - Consider some key pricing strategies

Pricing to the Market
Compare prices with your competitors for similar products and services. Set the price range that customers will expect. You can use that market price range--what is acceptable to the market--as a guide to set your prices. Businesses or people to whom you sell may also price to the market by telling you what they will pay for your product or service. As you keep records of actual costs, the cost approach to pricing will help you make sure all your costs are covered, which may not be true in a market approach to pricing.

NOTE: Be careful about underpricing in order to compete or make sales. Use competitor's prices to establish the price range for similar products or services but don't under price; if your true costs are higher, your final prices will have to be higher.

Cost Approach to Pricing
Price must cover all costs of goods/services sold, including production costs of supplies, materials, fixed overhead, and time/labour, plus a profit. Costs should include costs of production, labour and non-labour, including overhead or fixed costs as well as supplies and materials.
Use this simple formula in setting a price (per unit):

Total Costs of Production Per Unit + Desired Dollar Profit Per Unit
Businesses can set different profit rates, for example 15% profit on supplies and materials, 20% profit on labour/time, and 25% profit on overhead. These more complicated approaches to pricing usually emerge in response to the special needs of a particular business.

If your research reveals that similar products or services are available on the market at a cost much lower than what you could offer, you may have to either adjust your profit margin, the return you expect, or decide to provide enough specialized service or selection that the market will pay the extra. Alternatively, you may be forced to conclude that you cannot afford to make this item or provide this service and look for something else to do.

NOTE: Remember to cost materials at the level it costs to replace them - NOT at original prices; include salaries as a business expense; include interest in your business cost calculations -- interest that could have been accrued had the money used in the company been invested elsewhere (i.e. a bank); make allowances for future refunds, servicing, bad debts, amortization of capital costs of equipment or machinery.

Calculating actual costs is the only proven way to make sure your prices cover your costs. Labour/time charges are to be covered partly in the costs of production and partly as a salary in the fixed/operating or overhead costs. In summary, key points to consider in setting prices are:
marketing strategy and your immediate goals
competitors' prices, and the market
market demand for the product and consumer buying trends need to cover costs and provide an adequate profit.

Step 4 - Price your product and review regularly

Don't guess or do your pricing on a whim. Take time and go through the process and you'll be on the right track to a more successful and profitable business.

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.

Whatever route you choose, even a small increase in price can have a big positive effect on the bottom line–especially if you’re a high volume producer, notes co-authors Dolan and Simon. If Coca-Cola raised its prices 1% across the board, the company’s bottom line would rise by 6.4%, they write.

Remember that you can always increase your price. See Additional Coaching bellow for some tactics on raising your price.

I trust this was helpfully
To your success!!