Theoretically, the price you set for your product or service will have a
direct relation to the demand it will have at that price. At a glance, you can
have a quick analysis whether you have under-priced or over-priced your
product based on the reaction of the customers. You may want to make
adjustments as the demand increases or decreases.
It is easy to calculate and set a price. However, it should be remembered
that pricing varies between businesses. What works with one may not be true to
others. Nevertheless, it almost always follow some basic rules which will be
workable in every situation.
In a traditional business, for example, many stores set their prices on a
specified or fixed mark-up: for example, setting the price 200% of the
acquisition cost. That means that when they buy a merchandise for $5.00, the
selling price is automatically set to $15.
This pricing method can be sufficient for some operations. However, some
entrepreneurs fail to calculate other expenses which can greatly reduce the
gross profit as expected from the 200% mark-up. Most of us forget to include
many variable expenses to our costs, and ultimately lose track of new expenses
which may affect our original costs, so much so that the prices initially set
do not reflect an effective cost plus profit figure.
If the costs are not properly incorporated in the selling price, there is a
chance that the whole operation may not be profitable after all - a surefire
way to financial disaster. Failure to properly account for all costs, despite
thinking that a considerably high mark-up over the cost is placed, is a common
reason why some businesses fail.
To use this formula effectively, you need to understand the cost structure
of your business. Your business has fixed and variable costs which must be
integrated with the cost of the products or services. These are:
- Space Rent (add a cost even if you are using home office space)
- Employee (s) (if any)
- Employee Benefits (if any)
- Taxes
- Utilities
- Security
- Office Equipment
Variable costs that can affect your overall profits can include:
- Postal and messengerial Services
- Freight and Delivery Charges
- Promotional Efforts
- Distribution costs
- Phone Calls
- Business Forms
- Advertising
- Printing
- Office Supplies
Once all the costs have been calculated, the next step is to calculate the
amount of profits you expect to make.
Another technique many entrepreneurs use to test their prices is to offer
an Introductory Price. In order to stimulate demand, the prices can be
discounted on specific periods of time as a special promotional effort. As
time passes and demand increases, the price can be adjusted higher until it
reaches a stabilized level.
Prices, however, are not necessarily set under one guideline. It is easy to
price your products or services based on your costs and the percentage of
profit you want to make. However, to determine the most effective price, you
have to think of your customer. Many products and services can be priced
according to the perceived value of the product or service by the ultimate
user.
Better profits can be made when you come up with a product that could be of
immediate need. Snow shovels, for example can command higher prices when there
is an announcement of an impending snow storm in your area. You can also bunch
together your products or services as a package, and generate higher profits.
A set of three CDs recorded with children's songs may cost $10.00, but the
same set may be sold for US150.00 if it were sold as children's educational
and learning set. A stem of rose may cost fifty cents but may sell for $30 if
bunched into a bouquet of twelve. And many other ways.
Keep watch of special events, seasons or occasions. Again, roses can
command up to $100 a dozen on Valentine's Day. Items related to occasions such
as Christmas, Halloween, Easter, etc. always command higher prices during the
celebrations. However, if you were involved with seasonal items, try to
maintain a low inventory as it can drastically eat up your over-all profits if
you are not able to dispose them on time.
There are other factors that can also affect your pricing decisions.
Competition, for example, can prevent you from setting your prices at higher
levels. Market conditions, like recession can force you to reduce prices
drastically as to affect profitability.
In the end, where the survival of your home business greatly rely on the
revenue that it generates, you have to pay particular attention to how you set
your prices. Calculate your costs and look a little bit farther. Through a
serious research on your target customers, you can anticipate how much they
are willing to pay for your product or service and set your prices where it is
best advantageous.
Good luck!
Recommended Readings:
The
Strategy and Tactics of Pricing : A Guide to Profitable Decision Making by
Thomas T. Nagle, Reed K. Holden
Power
Pricing : How Managing Price Transforms the Bottom Line by Robert J.
Dolan, Hermann Simon (Contributor)
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