Pricing goods and services may be the toughest task in business. It's generally agreed the primary goal of a firm is to make a profit. But many small businesses fail to master this goal because they don't consider all the factors necessary to make prices competitive and yield that elusive profit.
Before setting prices, you must know the market, distribution
costs, and competition. Remember, the marketplace responds rapidly
to technological advances and international competition. You must
keep abreast of the factors that affect pricing and be ready to
adjust quickly. There are several pricing strategies; select the
approach that will make your goods or services the most competitive
and will help you reach your profit goals.
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.
An alternative is to base your price on those of your competitors.
A small retailer, for example, should compare prices with a store
that's comparable in size and customer volume. It's very chancy
to compete with a large store's prices, because they can buy in
larger volume and their cost per unit will be less. Instead, price
products based on your local small-store analysis, 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.
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
A word of caution: pricing goods below the competition can be
difficult to sustain. Why? Because every cost component must be
constantly monitored and adjusted. It also exposes a business
to pricing wars. Competitors can match the lower price, leaving
both parties out in the cold.
This strategy is possible if price is not the customer's greatest concern. Considerations important enough for customers to justify paying higher prices include
This strategy targets a precise segment of the buying public by carrying products only in a specific price range. For example, a store may wish to attract customers willing to pay over $50 for a purse. Price lining has certain advantages:
This approach involves selling a number of units for a single
price -- for example, two items for $1.98. This is useful for
low-cost consumable products, such as shampoo or toothpaste. Many
stores find this an attractive pricing strategy for sales and
year-end clearances.
Every component of a service or good has a different, specific cost. Many small firms fail to analyze each component of their commodity's total cost, and thus 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. Material Costs are the costs of all materials found in the final product. For example, the wood, glue, and other materials used in the manufacturing of a chair are direct materials. Labor Costs are the costs of the work that goes into the manufacturing of a product. An example would be the wages of all production-line workers producing a certain commodity. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel-hours needed to complete the job. Remember to use not only the hourly wage but also the dollar value of fringe benefits. These include social security, workers' compensation, unemployment compensation, insurance, retirement benefits, etc. Overhead Costs are costs not readily identifiable with a particular product. These costs include indirect materials, like supplies, heat and light, depreciation, taxes, rent, ads, transportation, and insurance. They also cover indirect labor costs, such as clerical, legal, and janitorial services. Be sure to include shipping, handling, and/or storage as well as other cost components.
Part of the overhead costs must be allocated to each service performed or good produced. The overhead rate can be expressed as a percentage or an hourly rate. It is also important to adjust your overhead costs annually. Charges must be revised to reflect inflation and higher benefit rates.
It's best to project costs semiannually, including increased executive
salaries and other projected costs.
As a consultant, you will most likely price your services 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.
Your pricing structure and policy are major components of your public image and are crucial to securing and keeping your clientele.
Pricing for service businesses may be more complicated than other retail pricing. The equation, however, is the same: cost + operating expenses + desired profit = price
The key to success is to have a well-planned strategy. Establish
your policies and constantly monitor prices and operating costs
to insure profit. Accuracy increases profits!
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