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Models for Setting Business Prices
According to a SCORE business counselor, pricing practices for a product or service vary greatly from business to business. One has to cover his or her expenses, make a profit and determine what value a consumer places on your product. This counselor works in the apparel industry and his rule of thumb is to double the wholesale price to arrive at the retail price. However, in a high-volume business such as a supermarket, the mark-up may be only a few percent or less. If you are trying to set the price for a service business you may want to contact at least three competitors to find out what they charge. There are many different models for pricing your product or service. The two most common are-
- Cost-Plus Pricing is based on your fixed and variable production and delivery costs with an added profit margin.
- Value-Based Pricing is based on the consumers perceived value of your product or service.
Other pricing strategies include-
- Variable Cost-Plus Pricing calculates the markup based on both the fixed and varying costs of production.
- Competitive Pricing is used when the market is saturated with many competitors and a price better reflects the product's perceived added value.
- Dynamic Pricing varies depending on time period and demand.
- Tiered Pricing where prices are set based on differing levels of quantity such as 1-9, 10-99, 100-999, 1000-etc. or quality such as economy class, business class, first class, etc.
- Price Skimming where a high initial price is charged on a new or novel product and then is gradually reduced when competitors enter the market.
How you price your product or service can communicate its value to your customer. A price much lower than your competitors may cause consumers to believe that your product or service is inferior to your competitors even if it isn't. A thorough pricing analysis takes into account-
- the costs of producing your product or service such as raw materials and labor
- your competitors' pricing
- your customers' perceived value of your product, and
- understanding the spending habits of your potential customers, found in consumer market research (the Business Center has Mintel for the U.S. market)
Further pricing guidelines can be determined by the profitability benchmarks in reports such as Key Business Ratios within Mergent Intellect.
How to Price a Product (NerdWallet)
How to Price Your Product: A Step-by-Step Calculation (U.S. Chamber of Commerce)
