Pricing products

Pricing of new products is both art and science – but mainly it’s business. So often new businesses set prices too low to sustain any modicum of profitability, or too high which takes them out of competition. Home-based businesses are especially vulnerable to setting prices too low.

There are several methods commonly used in setting a price. The easiest (and generallymost flawed) is to charge what the closest competitor charges. Such pricing does not take into account competitive advantages, differences in features and benefits, and the actual cost of production. A second method is to arbitrarily set a price and see if the market will accept it.

The smart business owner carefully analyzes the total cost of production – the cost of materials, subcontractors, and labor – and adds a reasonable percentage to cover sales and marketing, other overhead, and profit to arrive at a proposed selling price. Then, comparing benefits with those of competitors, adjusts the price to the point of assuring that it reflects the perceived value of the product (while still being profitable).

A mistake frequently made by new businesses, particularly home-based, is to base selling price on production cost alone without considering other overhead costs. Even though overhead might be low when working from home, costs will increase if expanding to an office or warehouse, and it might be difficult to at that time raise prices. When setting prices a rule of thumb (but will vary by industry) is to assume that the cost of production represents between 40 and 60% of the sales price. There is now ample room for paying for marketing and other overhead costs and still providing the owner some profit.

Will Limkemann
www.siqualtd.com