Pricing Your Products and Services: A Basic Review

Retail Cost and Pricing

A common pricing practice among small businesses is to follow the manufacturer's suggested retail price. The suggested retail price is easy to use, but it does have one major shortcoming - it doesn't adequately account for the element of competition.

Competitive Position

An alternative to the manufacturer's suggested retail price is to base your price on those of your competitors. For example, a small retailer should compare prices with a store that's comparable in size and customer volume. It's risky to compete with a large store's prices because they can buy in larger volume, and their cost per unit may be less.

Instead, price products based on your local small-store analysis, and then highlight other competitive factors, like personalized customer service and convenient location. There are any number of factors that influence a consumer's decision to buy from a certain business, including price, convenience, and courteous and attentive service.

Pricing Below The Competition

Some vendors have been very successful pricing their goods or services below the competition. Since this strategy reduces the profit margin per sale, it requires a company to reduce its costs and:

• Obtain the best prices possible for merchandise
• Locate the business in an inexpensive location or facility
• Closely control inventory
• Limit the line to fast-moving items
• Design advertising to concentrate on price specials
• Limit other services.

Pricing Above The Competition

This strategy is possible when the cost of an item is not the customer's greatest concern. Considerations important enough for customers to justify paying higher prices include:

Multiple Pricing

This approach involves selling a number of units for a single price, for example, two items for $1.98 and is useful for low-cost consumable product, such as shampoo or toothpaste. Many stores find this an attractive pricing strategy for sales and year-end clearances.

Cost Factors and Pricing

Every component of a service or product has a different, specific cost. Many small firms fail to analyze each component of their commodity's total cost, and, therefore, fail to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service.

Cost components include material, labor, and overhead costs:

Figuring Costs and Profits For a Consultant Service

As a consultant, you will most likely price your service by the hour. Remember to charge for an adequate number of hours. Travel time is usually listed as an extra charge.

It's unlikely that all your time will be billed to clients. Therefore, hourly or contract fees must be set high enough to cover expenses during slow periods. That is why one-half of the total normal working hours for a given year are used in figuring overhead rates. Try to obtain long-term, monthly, or contract assignments when possible.

Summary

Your price structure and policy are major components of your public image and are crucial to securing and keeping your clientele.

The key to success is to have a well-planned strategy. Establish your policies and constantly monitor prices and operating costs to ensure a profit. Accuracy increases profits!