Pricing

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Understanding Cost & Pricing for Profit

Introduction
Pricing your product or service is one of the most important business decisions you'll make. You must offer your products for a price your target market is willing to pay–and one that produces a profit for your company–or you won't be in business for long! There are many approaches to pricing, some scientific, some not. This article provides a framework for making pricing decisions that takes into account your costs, the effects of competition and the customer's perception of value.
A quick note about how the terms "cost" and "price" are used in this article:
o Cost is the total of the fixed and variable expenses (costs to you) to manufacturer or offer your product or service.
o Price is the selling price per unit customers pay for your product or service.
So, when customers ask, "How much does it cost," your answer is your price.
The Fundamentals: Price Floors and Ceilings
Think of cost as the floor–you must set prices above the floor to cover costs or you will quickly go out of business. (If you decide to set prices at or below cost it should be for a temporary, specific purpose such as to gain market entrance.)
Think of customer "perceived value" as the ceiling–this is the maximum price customers will pay based upon what the product is worth to them. This is sometimes described as "what the market will bear." Perceived value is created by an established reputation, marketing messages, packaging, sales environments, etc. An obvious and important component of perceived value is the comparison customers and prospects make between you and your competition.
Somewhere between the floor and the ceiling is probably the right price for your product or service; a price that enables you to make a fair profit and seems fair to your customers. Consequently, once you understand your cost floor and your value price ceiling, you can make an informed decision about how to pr...