How to Determine What to Charge for Products and Services

Dear M & M: 

How do I determine what I should charge for the products and services I am selling?

– Betty

Dear Betty:

Many times pricing is determined by market conditions and your competition. However, every company should have a clear pricing strategy. Do you aim for high volume/low prices or low volume/high prices? Generally there can only be one low volume supplier in each marketplace. Setting prices is complicated by the way customers react to price changes. This sensitivity is called price elasticity.

One should be aware if your products or services are sensitive to price changes. If your sales are sensitive to small increments in price changes and a small price increase leads to a large drop in sales your product or service is considered elastic. If a big swing in pricing has no effect on your product or service is considered to be inelastic. Generally, products or services that have substitutes tend to be elastic.

Customers can substitute and purchase a similar product avoiding the incremental price increase and still fulfill their needs. Pricing factors to consider are explained in the following formula. Price = Image + Service + Product + Overhead + Profit + Risk. –Market Planning Guide, Robert Bangs, Jr.  Common pricing objective include capturing, maintaining or building your market share, maximizing return on investment, being competitive, bringing new products and services to market and finding ways to increase sales.

In addition, ones pricing policies need to consider perceived value to the consumer, product differentiation, service (before, during and after the sale), location to suppliers and consumers, marketing objectives (profits, market share, image) and your business costs.

One needs to know your break-even or how much your organization needs to sell to cover expenses. Setting prices is an important function in every business. Some pricing strategies frequently used include: Premium Pricing – Rolls Royce, consumers are willing to pay a premium price in exchange for status or a superior product. Economy Pricing – generic brands, where the perceived quality is secondary to savings.

Market Penetration – loss leaders and setting the price low to gain market share. Skimming – prices are set high to maximize profits where the product is unique or has a competitive advantage. One needs to understand several key components about your external and internal environment and develop a strategy that accomplishes the goals of the organization.

Whatever you do don’t develop a strategy that isn’t flexible to changing needs in the marketplace.  As one can see thought and consideration of several factors need to be considered before you set any prices.  Remember all pricing strategies are competitive; a major factor to consider is what are others doing in your marketplace. At the end of the day what effect does the price set on your products and services have on sales, profit and marketing goals in your organization?

-M&M

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