Tuesday, May 13, 2008

Pricing Your Product or Service

You need to familiarize with some basic pricing concepts.

Value: is what your customer believes the product is worth.
Price: is the amount you charge customers for the product.
Cost: is what you spend to produce your product.
Profit: is what's left over after you subtract costs from price.

Pricing: is the process of figuring out how much to charge per sales unit. A bookstore's sales unit would be a single book, while a housecleaner's sales unit could either be an hour of work ($10 an hour) or a specific job (clean the garage for $50.00)
In pricing, the cost is often called the floor. You can't go below it, otherwise you will be given the product away.
Value: is the ceiling. It's the maximum your customers will pay, based on what they think your product is worth. That means your costs should be as low as your brand identity (i.e. quality, and positioning) permits, and your value should be as high as possible. One perfect example is real estate: If a 1,200 sq ft home located in the best school district and in a very desirable area, this house will have a premium, high value and a high demand.
Demand: refers to the amount your product that customers are willing and able to buy at a specific price. A customer who has $10 to spend might be willing to buy two pillows if your price is $5 per pillow, but only one if your price is $7 per pillow. Being able to afford the product is an essential part of demand; just wanting the product doesn't count!

Check out what is happening to the auto industry with high price of petroleum. As the price per gallon of gas increases the demand (driving) decreases. Also, customers will look for alternatives such as smaller cars versus SUVs.

Pricing Objectives:
The pricing objectives depend on a variety of factors, including your production costs, brand identity, competitive environment, and so forth. The most common pricing objectives are:
Maximizing Profits
Maximizing Sales Volume
Return on Investment
Meeting or beating the competition
Quality leadership
The marketing approach to pricing is based on the 4 C's. From the buyer's viewpoint, the four P's might be better described as the 4 C's.
Customer Solution
Customer Cost
Customer: Your target customer's income, lifestyle, and values affect your price.
Customer Cost: To set a price that will earn a profit, you will know your total variable and fixed cost.
Convenience:Place, locations, channels
Communication: Advertising, Personal Selling, Sales promotion, Public Relations.
Pricing Strategies
Cost Plus Pricing: Very common and simple pricing method. It's based on the known factor of cost. It involves totaling your fixed and variable costs, and adding a target return to determine your sale price. The Target return is usually expressed as a percentage of total cost.
Competition Based Pricing: Not a great strategy. The competition could have an entirely different cost structure to guide their pricing. It is better to use competition based pricing as a general guide only; DO NOT assume that you have to price either as low or as high as your competition. My advice is do not compete on price.
Value Based Pricing: The goal is to charge an above average price, while leaving customers with the feeling that they've gotten a good deal. Here are some reasons why consumers may pay more for your product:
Customers like you and trust you
You were recommended by someone they like and trust
You offer convenience or faster service
You offer security or reduced risk
Your products confer social status or distinction
Buying from you aids a cause or supports a philosophy
Your products are unique, artistic, or of higher quality
Retail Pricing: Retail pricing is used when merchandise is purchased from a manufacturer or wholesaler, and then sold again to the end user. Although retailers don't produce the goods they sell, they still have overhead costs. Their price must cover all these costs, and offer an acceptable profit.
To get a retail price you multiply the wholesale price by a certain percentage (called a markup)and add that to the wholesale price. A retailer using a 25% markup might buy a t-shirt at $8, and sell it for $10 ($8 + $2) Many retailers double or triple the wholesale price.
Your markup is the difference between the price you pay for the product, and your final selling price. This can either be a percentage of the cost, or the retail price.
Suggested Retail Pricing: Many wholesalers and manufactures have established what they think are the best prices to charge for their products, which is often referred to as "suggested retail price." This can be a guide for your pricing strategy, but you still need to analyze your costs to be certain that it will allow you to make a profit.