Areas to Control I-Z

Control - Pricing

Pricing Your Product
Pricing your product is an important part of your marketing program, whether you are a manufacturer, a wholesaler, a retailer or a consultant. There are four keys to pricing:

  1. You need to know your market.
  2. You need to know your costs.
  3. You need to know your competition.
  4. You need to know the goals of your company as to profit.

When you are calculating your costs it is sometimes clearer to wholesalers and retailer but it is not so clear to manufacturers. In order to arrive at the final cost of your finished products the manufacturer needs to establish a costing system to account for the cost of materials, direct labour and factory overheads.

If you are the manufacturer then once your costing is complete you will need to determine a fair list price for your products that will achieve your desired profit objectives. This price can only be set after taking into consideration the market demand as well as your competition.

Control your Pricing Strategy
Consider strategy when pricing. If pricing were just a matter of putting together asset of numbers into a formula and coming out with the right figure then there wouldn’t be a need to have a strategy.

The first thing that you need to find out is how responsive your market would be to a change in price. This response is called elasticity. Products such as eggs, razor blades and medicines are highly inelastic. That is, people will buy them whatever the price because they are a staple or essential part of the everyday diet or food needs. Regardless of whether the prices are raised or lowered, people will continue to buy in approximately the same quantities.

Elastic products however fluctuate with the price. A small change in prices either up or down will result in an increase or decreases in what people buy. Examples of these are television sets, DVD equipment, leisure gear, higher priced non essential clothing etc.

As a rule, items that are seen as necessities are less elastic than those that are considered to be luxuries. This is because the customer needs them regardless of the price. (e.g. The person who has a headache does not wait until the aspirin on sale comes down in price before buying it, he needs to get rid of the headache immediately and price is not an object).

But how does all this affect your pricing strategy?
Well for one thing, the more elastic your product then the easier it is to raise your prices without hurting your sales. To increase your profits on highly elastic products rather than raising your prices you might try lowering them. Because although this reduces your profit on each unit sold the resulted increase in sales volume will probably increase your overall profits.

What Should You Control
The main thing to watch in your prices is that it should cover all your costs and leave you with a profit. This may sound like a simple thing to do but determining your business costs and arriving at your price is not always easy.

Even if you calculate your price, at the end of the day the final price is what your customers are prepared to pay for your goods or services. If your prices are too high they will go elsewhere, if they are too low they will come to you but you will not make a profit.

If your business is new and you set a price, this can be a real problem to you because you don’t know what the market will accept. If you are buying a business that has already been operating for some time then the prices have already been established in the market because you know what people are prepared to pay.

The things you need to watch out for are your costs, your competition and your customers.