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Wednesday, September 18, 2013

Pricing Products for Profit

Here are some things to take into considerations when setting the price of your products:

  1. Start with identifying and understanding your direct costs (e.g. material, supplies)
  2. Add the labor component. This includes direct payments for labor and benefits as well as paying yourself as operator of the business. Don’t undervalue or overvalue yourself. If you worked for someone else you would get paid.
  3. Don’t forget indirect costs as well (e.g. space, utilities, services – legal and accounting, cost of money and loans, transportation, taxes, insurance, permits). Should you allocate an after-sale service cost for this product? Don’t forget to set a value for the difference in payment terms between when you pay for things and when you get paid for the product.
  4. Check competitors and/or trade publications for any pricing guidance in your geography. If this results in a price less than the total of your direct costs, plus labor, and indirect costs, you cannot stay in business with this model. Something must change to make it viable. If this analysis results in a price higher than this total, you have other decisions to make:
  5. How much profit can you make? Do you want to be a price leader? Quality leader? Can you offer something to differentiate your product and justify a price premium? Can your supply chain support your pricing decision (e.g. can you get enough volume?), will you have a multi-tier pricing strategy (e.g. retail, wholesale, online, storefront)
  6. Add a cost element in the profit margin for funding expansion of the business. Forgetting this can be fatal.
  7. If you have set the price using an explainable algorithm, your customers will be able to understand the value of purchasing from you.
  8. Remember to watch the competition and review your pricing regularly. Consider any seasonal variations that may be useful. (e.g. pricing may be higher for ice cream in the summer, sweaters in the winter, holiday items just prior to the holiday
How are you setting your prices?

Steve Koenig, SCORE Counselor





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