The Science of Pricing Products

Dear M & M: I am considering opening a business and not sure how to price my products. Do you have any thoughts? – Joe

Besides making sure your cost of goods is low enough to be able to sell to make a profit. One must first determine what does it cost to make or have one widget ready to sell?  Pricing correctly will enable one to have money left to actually generate a profit. You need to know your costs of goods and operating costs to sell one unit. Remember do not forget substitutes.

Many times when your product or service has an alternative option and one prices too high, consumers may opt out and buy the substitute. If you sell more do your operating costs go up, down or remain the same? How many can you sell? Is the product scarce or can you get a ready supply whenever you need more? Do you want repeat customers, is there a warranty, and is service after the sale part of the deal. All these thing need to be considered.

Just as important look who is purchasing your products and services and what will they pay? What is the person making the buying decision willing to pay? Looks like it is time for a competitive analysis. Who is the competition selling similar products and services in your market and where are they located? What is their reputation? How deep are their pockets? Are their cost to do business less than yours? How do your competitors react to competition in this market? Will they lower their prices, offer more services, advertise more or stay open later? Maybe your competition does not even see you as competition and don’t care what you do.  Do people buy what you are selling online? Can you compete with other companies that are doing online sales? Besides pricing.

What are other services or characteristics your competitors offer (extended credit, free oil changes for life, maybe a birthday cake once a year)? As you can see a lot goes into creating a price for one’s product or service. Understand your marketplace and your place in it.  Knowing what is being sold, by who, when, where and for how much is all part of pricing. It is called a pricing strategy. Every company should have a strategy based on what they want to accomplish through the price they charge. Every action has a reaction in every market.

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