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Pricing Your Products – Four Tips of the Trade

Guest post by: Joseph Lizio

Article Overview: Pricing is one of the hardest issues many businesses will face. Set prices too high and you lose customers. Set them too low and you won’t be able to cover your own costs. The goal is to find that delicate balance and here are four tips in doing so.

Pricing Your Products – Four Tips of the Trade

There are many rules of thumb when it comes to pricing your business's products or services; from what the market or consumers can bear to the level of scarcity (meaning the lower the volume the higher the price - think about what happens to gas prices when oil production is cut). In fact, there are probably as many pricing rules as there are potential price points. Regardless of what rule of thumb you may eventually subscribe to, here are four key issues to keep in mind:

Competition: Always watch your competition and how they price their products. Many consumers comparison shop today - especially for everyday necessities. Plus, given the reach and breadth of the Internet (not just computers but smart phones and PDAs), consumers have more information at their finger tips no matter where they are at - to include standing right in front of your product checking competitor's prices.

Your prices should be inline with your competitors - not higher and not lower. If your prices are higher, you will drive away customers. If they are lower (majorly lower), many consumers will believe (based solely on price) that your products are not only cheap but must also be inferior.

Cost Coverage: Your pricing should not only cover your variable and operating costs but should provide a reasonable profit as well. If you cannot price your product to at least earn the minimum net profit margin of your industry, then you might need to think about changing your business model, changing your business all together or finding a new career field. The bottom line, you are in business to make money and if you cannot profit, you are only wasting valuable time and resources.

What to watch for:

First, your pricing should cover your variable costs. Variable costs are costs that would disappear completely should your business not produce another item or provide another service. Variable costs can include direct labor, direct materials or any costs associated with directly providing your business's offerings.

Second, your pricing should cover your fixed costs or overhead. After your business covers it direct or variable costs (usually termed cost of goods sold), your pricing should also cover any and all general and administrative expenses (costs that are not directly tied to each marginal or individual product but to the overall business itself). Overhead costs can include (to name a few) marketing, salaries, office supplies, debt payments, rent, utilities, etc. Any cost that your business would occur whether it produced one product or one million products.

Lastly, profit. You are in business to make money and if your prices, in conjunction with your cost structure, are not high enough to generate a reasonable return (something better than you can achieve elsewhere) you either need to make changes in your costs, pricing or both or find other avenues to deploy the resources you currently have that will return some type of profit. Anything less is just a simple waste of both time and precious resources (money is a resource).

Perceived Value: There are times that you can and should attempt to charge higher prices than that of your competitors. But, you should only do so if you can convince your targeted customers that your products offer a better value - a value that better meets their needs. This is where your marketing efforts come into play. Here, you can get away with the higher price if you can convince your market that a feature of your product will make their life easier than your competitor's products. It really comes down to actually convincing your customers - regardless of what YOU believe.

And finally,

Play Around: Play may seem like the wrong word here but the concept fits. It is very hard to predict what will happen tomorrow. Thus, you have to remain flexible in your pricing. After completing your research, try a price point. Then, converse with your customers. If you are hearing that your prices are too high, change them. If you are hearing that consumers are hesitant, maybe your prices are too low. Just know that nothing is ever set in stone and as the world changes your pricing structure should also change with it.

No matter what rules of thumb you may employ in setting your prices, keep these four topics in mind as your business moves forward. The bottom line is that your business must provide products your customer base wants at price points they perceive as reasonable as well as provide you, the business owners some level of adequate return for your time and risks.

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Article Tags: business, competition, cost, pricing, profit



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