Financials & Advisers

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 4 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.

Other factors that will come into play when determining your price include:

  • Penetration of new markets.
  • Your attempt to increase your market share.
  • Previous actual and projected profits.
  • Whether you wish to meet or exclude the competition.
  • The life cycle of your products.
  • Other external factors such as economic trends.

Each of the above factors will pay a major role in your final pricing decisions.

Factors when pricing Your Products and Services
Before setting your prices you need to understand fully the market for your products, your distribution costs and your competition. You need to keep abreast of all the factors that affect pricing and be ready to adjust if necessary.

Factors that you will need to consider include:

  1. Retail cost and pricing. A common practise amongst small businesses is to follow the retail price that is suggested by the manufacturer and adjust all their pricing accordingly. This method is easy to use but it can cause problems. It can create a wrong image for the price because it doesn’t consider the competition.

  2. Pricing below your competition. Many businesses can be successful using this type of pricing method. All that happens is that they reduce their profit margins so that their total price is below their competitors.

  3. Competitive Position. Here the price is based on those equal to or lower than the competitors. By comparing prices with a similar store the price can be set to be so that it is below the competition. The problem here arises when a small business tries to compete with a large store who buys in bulk. The large store is able to arrive at a costing which is less due to bulk buying discounts. In this case it is best to highlight other factors such as customer service. A lot of consumers will be happy to pay more for their goods if they can go somewhere where they can have personal and courtesy service and advice.

  4. Pricing above the competition. If the price is not the consumers concern then this strategy is possible.
    Customers are prepared to pay the higher price because of:

    • Service considerations. They receive delivery, speed of service, and full satisfaction from the employee.
    • The store is located in a convenient location.
    • The store has merchandise which is exclusive to them.

  5. Price Lining. The strategy here is to only carry products in a specific price range for the buying public. For example the store may be keen to attract customers who are prepared to pay over $20.00 for a particular item. The product is in a specific price range.

  6. Multiple Pricing. This method involves selling a number of units for a single price. For example, two items for $1.50. It is very useful for low cost consumer products and many stores find this a desirable strategy for end of year sales.

  7. Service costs and pricing. Every service has different costs but some service firms fail to analyse their services total cost and therefore fail to price them profitably. By analysing the cost of each service they can set their prices to maximise profit and eliminate unprofitable type services.