Pricing Strategies

Before setting prices, you must understand your market, distribution costs and competition. Remember, the marketplace responds rapidly to changes in supply. You must keep abreast of the factors that affect pricing and be ready to adjust or justify your pricing based on other factors.  This is your pricing strategy

This Financial Guide does not attempt to be an in-depth discussion of pricing analysis. Rather, it is intended only to provide a basic review of the several pricing strategies — and perhaps encourage you to take a fresh look at your present strategies. Professional financial guidance will be helpful in working up and evaluating the financial aspects of the analysis for your financial resources.

Retail cost and pricing

A common pricing practice among small businesses is to follow a standard pricing formula. The standard formula price is easy to use, but it does have one major shortcoming; it doesn't give you an advantage over your competition.  

Competitive position in pricing

An alternative to the standard pricing model is to base your price on those of your competitors. A small company, for example, should compare prices with a company that's comparable in size and customer volume. 

Instead, price products based on a local company analysis, then highlight other competitive factors, like personalized customer service and convenient location or some other differentiator. There are any number of factors that influence a consumer's decision to buy from a certain business, including price, convenience, and courteous and attentive service.

Pricing below the competition

Some companies have been successful by pricing their goods or services below the competition. Since this strategy reduces the profit margin per sale, it requires a company to reduce its costs and:

• Obtain the best prices possible for service or product
• Minimize your overhead costs
• Monitor labor and inventory
• Limit the service to those services that are typical
• Produce advertising that concentrates on pricing

One word of caution: Pricing goods below the competition can be difficult to sustain. Why? Because every cost component must be constantly monitored and adjusted. It exposes a business to pricing wars. Also, if you lower your price and your competitor lowers his price, then neither are making as much but without any competitive advantage.  

Pricing above the competition

This strategy is possible when price is not the customer's greatest concern. Considerations important enough for customers to justify paying higher prices include:

• Service considerations, including delivery, speed of service, satisfaction in handling customer complaints, knowledge of product or service, and helpful, friendly employees
• A convenient or exclusive location
• Exclusive merchandise.

Multi-level pricing

Multi-level pricing involves selling a number of units for a single price—for example, X number of hours for $XX or Y number of hours for $YY.  Many companies find this an attractive pricing strategy for encouraging larger commitments.  

Cost factors and pricing

Every component of a service has a different, specific cost. Many small firms fail to analyze each component of their commodity's total cost, and therefore fail to price profitably. Once this analysis is done, prices can be set to maximize profits and eliminate any unprofitable service.

Cost components include material, labor, and overhead costs:

• Material costs are costs of all materials found in the final product. For example, the wood used in the manufacturing of a chair is a direct material.
• Labor costs are the costs of the work that goes into the manufacturing of a product. An example would be the wages of all production-line workers producing a certain commodity. The direct labor costs are derived by multiplying the cost of labor per hour by the number of personnel-hours needed to complete the job.

Overhead Costs are any costs not readily identifiable with a particular product. These costs include indirect materials, (e.g. supplies) utilities, depreciation, taxes, rent, advertising, transportation and insurance. Overhead costs also cover indirect labor costs, such as clerical, legal and janitorial services. Be sure to include shipping, handling, and/or storage as well as other cost components.  

Part of the overhead costs must be allocated to each service performed or product produced. The overhead rate can be expressed as a percentage or an hourly rate. This is a complex task. 

It is best to consult with an expert in this area. It is important to review your overhead costs periodically. Charges must be revised to reflect inflation and higher benefit rates. It's best to project the costs quarterly, including increased executive salaries and other projected costs.

Conclusion

Your price structure and policy are major components of your public image and are crucial to securing and keeping your clientele.

Pricing for service businesses may be more complex that retail pricing. The equation, however, is the same: Cost + Operating Expenses + Desired Profit = Price

The key to success is to have a well-planned strategy. Establish your policies and constantly monitor prices and operating costs to insure profit. Accuracy increases profits!

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