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How to price for optimum profit - 5 steps

Written by: Peter Lawless

Article Overview: One of the greatest problems that businesses face is getting the pricing strategy right. This article explores the three key factors; all companies need to consider when getting this vital element on target. Missing only one of the three can have disastrous consequences. It is important also to realize that the best solution may also not be the cheapest.

How to price for optimum profit - 5 steps

As with everything, it does not take rocket science to get this right, however one slip, could seriously damage your bottom line. The three factors, equally weighted are as follows:

* The value that your customers put on your product and service

* Will you make a profit?

* What your competitors charge for the same or equivalent


So how do we define customer value?
Value is what a purchaser gets when they make use of your product or service. It is the figure that they put on, their new capabilities. Ones that you have delivered to him through ownership of what you sell.

Value is not always quantified in monetary terms. A golfer may go to a professional, get three lessons, and knock 10 off their handicap – so what is that worth to them? If they had previously spent €5,000 on lessons and still been awful, it could be worth an awful lot.

The most important consideration is that the buyer must feel that they got “good value” from their purchase.

However this good value must not be sold at a loss!
Given, you are in business to make a profit, it is important that you do not sell everything at a loss. It is fine to have loss leaders and indeed, offer freebies, to encourage new clients, or to reward loyal customers. However you business must be profitable, or else you will not have one.

To understand whether you are making profit from a product or group of products, you should factor in all fixed and variable costs. Then look at how many you will sell, and ensure it is worth your while selling at that price.

But what if it’s good for you and your customer, but your competitor is cheaper!
First and foremost, check that what they are selling is identical to what you are selling. If it is, all you will do is create a market that your competitor will clean up on.

The good news is that in 99.99% of cases, your products or services are not identical. This is where creating your unique value proposition is vital. This needs to distinguish you as being the best solution in your chosen target market or niche.

It is important also to realize that the best solution may also not be the cheapest. Let’s go back to the golf pro. He charges €60 a lesson for his services; his competitor charges €30 a lesson. But if what you want is rapid improvement, and this guy has testimonials to prove what he has done, by spending €180 with him, to get 10 shots off your round of golf, could save you thousands, that you could have spent with the €30 guy.

The bottom line is that your pricing must take into account the three key considerations; providing the better value than your competitors, at a profitable price.

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Article Tags: bottom line, capabilities, competitor, customer value, handicap, loss leaders, loyal customers, monetary terms, purchaser, rocket science, unique value proposition, variable costs, what your competitors



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Re: Proper pricing & profit margins - [quote="BuzzAroundBooks":pchmjytu]If you were buying products to re-sell on eBay or elsewhere, what kind of profit margins should you look for? More specifically, how much would you charge above cost to make the venture worth your while? I recently sold an item which had a 14% profit margin. Is that good or too low?[/quote:pchmjytu] With ebay one thing you need to consider is what price are you likely to get. If there are 200 people trying to sell a similar or identical item - you aren't going to get substantially more than they are asking. In turn, if you have the only one of an item, then you can ask for more - doesn't mean you're going to get it, but at least you can try. You need to determine how much you want to be compensated for your time and whether you need to sell the item or if you can let it sit around while you wait for a buyer who is willing to pay a higher price. You also need to figure how much you're going to need to pay in listing fees each week while you wait on the item to sell. The percentage could easily fluctuate depending on the overall value or price of the item. You can also take it to an ebay reseller and see if you would make just as much without the additional hassle of listing and sending it yourself. Depends on what you want out of the sale and what you're selling. Chris
Cafe Expenses - Hi Michele I used to work in a place that had a cafe that broke even every month. This is due to the fact that we couldn't get enough people through buying food and drinks to make a profit and the expenses consisted of: - Staff wages - Not selling all food so it would go to waste - Rent for occupying the premises - Selling products that had a low turn over - Customers would never come back a 2nd time due to the location I would imagine a restaurant would be the same with the hardest part attracting people every night to make a profit while setting your prices at the right price to keep people coming back.
Where to print a book - [quote:39vg8s93]So, writing a chapter a day, I finished in a month, and Kidpreneur: Genius Ways for Kids to Pay For College was born. Currently my book is self published -- I just printed up 100 copies to give to all the people featured in the book, teachers, and some more to sell at $20.00 a piece (it costs $10.00 a copy at Kinko's, so it's not really an outrageous price). [/quote:39vg8s93] If at all possible, you need to stop using Kinko's now and go price some real printers. It should cost only a couple of dollars a piece, if that, to print your book. Admittedly you'll have to buy in bulk, but the overall savings - selling a $2 book for $20 so that you make an $18 profit instead of a measley $10.... is something every kidpreneur should think about!
Re: Analysis/Paralysis - Of Course... - Thanks Martin. You see, I've been playing with a couple of business ideas over the last few months and while I've been taking proactive steps towards seeing if any of them are even feasible... I often find that I'm discovering ways in which my ideas "won't" work (or won't be profitable enough) because of competition, price points or whatever. However, I'm not sure if I'm just imagining excuses or if I have legitimate roadblocks. Maybe I just need to commit to one idea and "go for it" as you say.
Re: Matching competitors prices - beware - While I agree that getting into a price war should be avoided if possible... on rare occasions, it's not a bad idea to match someone's price (or even beat it) if you're doing it "one time" to land a new customer. For instance, I was recently looking for the best price on a [u:2rhwa2wg]specific[/u:2rhwa2wg] flight to NY and a customer service rep from Flight Centre ended up taking zero commission to help me book my flight. In fact, she even beat the price by $5 in the hopes of creating brand loyalty for the future.


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