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How To
Pricing Affects Your Business
By Tom Egelhoff
 When
most businesses begin the task of pricing products or services
they generally use some kind of "standard mark-up".
This is fine most of the time as long as the mark-up price is
OK'd by the market. It is the market that determines what something
costs, not your costs.
There is a narrow "window" that determines the "premium"
price you can charge for a product or service and the "floor"
price. The premium price is the highest price the market will
allow. The floor price is the least amount you can sell something
for and still make money. (See:
How To Do A Break-Even Analysis)
The price you use has an influence on many facets of your
business. Here are just a few to consider:
- Profit:
As mentioned above the price you arrive at determines
how much you make on each sale.
- ROI (Return on Investment):
When you opened your business you may have taken a loan or invested
your own money and the product price determines how quickly you
recoup that investment.
- Promotion:
The course of any small business seldom runs smoothly.
There are going to be times that you will want to do some type
of business promotion. Your pricing will dictate how successful
you will be with each promotion. (For promotion tips see: Section III:
Small Town Promotion)
- Image: Lexus or Yugo?
Do these two products have a price image? How much you charge
will effect the customer perception of the value of your service
or product. Low price economy, savings or fewer features. High
price prestige, status or quality.
When to consider changing your price.
As a rule, you should constantly monitor and review your pricing.
As the market changes you should change. If you raise your price
you need to be prepared to back it up with benefits that justify
the higher price. If you lower prices show the customer that
they are not going to have to make a sacrifice of quality. Here
are some circumstances where you might want to consider changes
in pricing:
- New Products: New products are an often used way to
raise prices. A newer improved product or service can command
a higher price.
- Industry Changes: There will be times when new regulations
or changes within your industry may affect your pricing. There
may be upgrades required to older products that will affect price.
- Going Into A New Market: As new markets emerge you may want
to take advantage of new profit centers. The price you charge
for new products or services will determine your success or failure
in these markets.
- Competition:
If the competition raises or lowers there price should you do
the same? I would ask, "How strong is your competitor?"
"What is the customer perception of the competitor and their
pricing?" If they are perceived as a "discount house"
you may not want to change prices. Make sure you know your market,
your customers, and your products.
- Inflation / Depression: The economy has been pretty strong the
last few years so you may not think this is something to consider.
Unusual things seem to effect the stock market and the buying
habits of customers. Always think positive but, be prepared for
the worst the economy has to offer.
- Change of Strategy:
When you introduce a new product or service there is a period
of time when sales are high because of curiosity and newness
of the product. As the newness wears off, so do sales. In order
to increase sales you can either, cut prices (not always the
best idea) or you can increase awareness through increased advertising
or promotion. Depending on the product, if sales go down, it
may be the fault of the product and not the price. For example:
where would you go to buy a good slide rule. They have been replaced
by the hand held calculator.
The Robinson-Patman Act
This legislation is designed to protect the small business
owner from price discrimination by suppliers. You will find this
act at http://www.lawmall.com/rpa/rpasec13.html
When in doubt about legalities of pricing consult an attorney.
(Return
To Small Town Marketing.Com Main Menu)
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Here!
This article may be reproduced for your non-profit
group or organization provided it is not altered in any way and
the following is attached:
©1998 - 2004 Eagle Marketing PO Box 271 Bozeman, MT
59771-0271
http://www.smalltownmarketing.com - (406) 585-0219 - Toll FREE
(888) 550-6100
email: tommail@smalltownmarketing.com
Based in Bozeman, MT, Tom Egelhoff is the author of How To Market, Advertise & Promote Your
Business Or Service In A Small Town, and The
Small Town Advertising Handbook: How To Say More And Spend Less.
He is also a seminar and workshop presenter
and trainer. He may be reached at 888-550-6100 or PO Box
271 Bozeman, MT 59771-0271
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