Pricing your product or service

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Pricing your product or service
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There are many ways to price a product. Let's
have a look at some of them and try to
understand the best policy/strategy in various
situations.
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Product pricing is hard. There is no magic
formula that will determine the best price for
your product. I can't provide any easy answers,
but I can give you some things to think about as
you make your pricing decisions. In the end, you
will just have to make a decision using your own
judgment. There will be times you will wonder if
you made the right decision. You may never know
for sure.
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Let us first say that our goal is to find the
price at which profit is maximized. If we say
that a price is "too high" or "too low," we are
saying that our profit could have been greater
if we had set the price either lower or higher.
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You set prices when you develop a new product or
service, when you market to new customers, and
when you bid on new contract work.
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• Follow these six steps when setting a price for
  your business
• product or service
• 1.Select the pricing objective for your product
  or service
• 2.Determine the demand for your product or
  service
• 3.Estimate the costs for your product or service
  
• 4.Analyze your competitors' prices, products and
  services
• 5.Select a pricing method for your product or
  service,
• 6.Select the right price for your product or
  service.

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SELECTING THE PRICING OBJECTIVE.
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First decide how you want your price to position
your business. Consider pursuing one of the
following four major objectives through your
pricing
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1. Survival, if your business is plagued with
overcapacity, intense competition, or changing
consumer wants.
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2. Maximum current profit
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3. Market-share leadership, if owning the largest
market share will result in your business
enjoying the lowest costs and highest long run
profit (achieved by setting prices as low as
possible).
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4. Product-quality leadership (achieved by
charging a high price to cover the high quality
of your product or service).
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DETERMINING DEMAND. Each price you charge for a
product or service leads to a different level of
demand. Therefore, demand largely sets a ceiling
to the price you can charge for the product or
service.
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ESTIMATING COSTS. Costs set the floor for your
pricing. The price must cover all costs of
producing, distributing, and selling the product
or service, including a fair return on effort
and risk.
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Consider the following costs Cost Per Unit of
product. This is a variable cost that is
duplicated with every unit of product sold. It
includes
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• Cost of the product
• Order processing
• Shipping and packaging
• Postage to mail the product
• Overhead and an allowance for bad debt

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Campaign and Overhead Costs. These are fixed
costs that vary little with changes in the number
of products sold. These include
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• Printed materials (cover letter, brochure, etc.)
  for a direct mail piece
• Mail preparation to stuff envelopes, sort and
  mail a direct mail piece.
• Postage to send mail pieces
• Advertising costs for display and classified ads.
  
• Other marketing costs such as telemarketing, card
  decks, the
• Internet, etc.
• Overhead costs such as accounting and office
  expenses

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ANALYZING YOUR COMPETITOR'S PRICES, PRODUCTS AND
SERVICES. While demand sets a ceiling and costs
set a floor to pricing, competitors' prices
provide an in between point you must consider in
setting prices.
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Several pricing strategies are available to you
to seek an advantage over the competition
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1.Price-discount strategy Offer customers a
product or service comparable to the leading
competitors at a lower price. 2. Cheaper-goods
strategy Offer customers an average- or
low-quality service at a much lower price. 3.
Prestige-goods strategy Launch a higher-quality
product or service and charge a higher price
than the leading competitor. .
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SELECTING A PRICING METHOD. Given the demand,
the costs, and competitors' prices, you are now
ready to select a price.
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Price is a promise. Each time a buyer chooses a
product, they match up a price with its
promises. So, as the owner of a small business,
it is your job to understand what are the price
and promises for your service.
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Determine your promises.   As you set your prices
(or consider raising them), take stock of all
the value factors that go into your price. What
attributes of your product or service are
noteworthy? Below are some examples of value
factors that go into a products or a services
price
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• For a product
• Quality of the raw materials
• Finished product performance
• Packaging
• On-time delivery
• After-sale service

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• For a service
• Experience level of the service provider
• Bottom-line impact of the final deliverable
• Appearance of the service provider
• Turnaround time on phone calls/emails
• Ability to meet deadlines

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As you can imagine, your ability to deliver
various factors, over and above your
competitors, directly impacts the prices you
set and get. If you promise certain factors, yet
fall short on delivering them, your price will be
challenged through customer complaints, delayed
payments or customer defections.
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Explore Pricing Methods. Use a variety of ways
to arrive at your price.
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One big mistake I see small business owners make
is using only one method to calculate their
prices. But, what if your calculations are wrong?
Then, you are stuck with a bad price. Instead, I
suggest that businesses use several different
methods to calculate their prices. 
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Method No. 1 Costing out a price.
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This first method takes into account your costs,
your desired profit, and then totals. These
indirect costs cover everything you need to keep
your business operating every day, whether or not
you make any sales. After youve uncovered what
all your direct and indirect costs are, add them
up. .
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One of our people here tonight sells ad
specialties (custom-t/shirts), so lets use them
for our next example.
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Just for fun, lets say they estimate they can
sell 20,000 t-shirts in a year. They know that
their expenses will be 100,000 on
this transaction.
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Dividing their 100,000 in expenses by the 20,000
quantity, you end up with a breakeven of
5.00/t-shirt. This breakeven price is the
lowest price you can charge and still cover all
your costs.
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The next step is to ask yourself what profit you
want. Lets say youd like to have 100,000 to
live on during the year. This is your profit. OK,
now take that 100,000 and divide it by the
20,000 t-shirts you expect to sell, and you come
up with 5.00/t-shirt. Add this to
your 5.00/t-shirt cost and the price you should
charge is 10/t-shirt.
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Method No. 2 Pricing competitively.
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After youve established your cost-based price,
you want to compare this price against market
prices. These are prices your competitors are
already getting, and are a key determinant of
your own pricing. 
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Finding competitive information isnt all that
hard it just takes a little creative work. If I
were an ad specialty sales person like in the
example above, I would visit 5 other t-shirt
shops and inquire about their pricing.
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Then Id ask myself do they offer the same
quality t-shirts as my current supplier? If
their prices are higher, what else are they
offering to justify the price? If their prices
are lower, is their product quality (or service)
noticeably lower? This kind of competitive
surveillance is crucial when determining your
prices.
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• Now, what if you are in a business-to-business
  market, or selling
• a service? Here are some common sources of
  information for
• competitive prices
• Your preferred customers who can supply you with
  price sheets from
• competitors.
• Trade associations who might monitor pricing
  among the trade.
• Job candidates interviewing with your companywho
  come from
• competitors.

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Pricing Mistakes and How to Avoid Them.
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The Worst Pricing Decision You Can Make. When
you think, We need the work. For now, well set
our prices really low. Then, as we get more
business, well raise our prices, alarm bells
should go off. This is one of the worst
marketing mistakes you can make.
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Why? Because youll struggle from the outset just
to cover your costs. And, even if you do have
some profit left over, youll resent working so
hard for such a little payoff.
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Youll also position your company as lower in
quality versus most of your competitors (whether
or not it is true). Avoid this situation at all
costs and price your service right the first
time. 
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Why Its Better To Make A Mistake On The Side Of
Higher Pricing
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If you have two price points you are considering,
but are unsure, which is right, choose the higher
one. This will position you as higher quality
and will ensure adequate profitability from the
beginning.
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And should you meet resistance at this price, you
can discount down to an acceptable price. The
alternative is choosing a too-low price, which
leaves no room for negotiationor profit.
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The Second Worst Pricing Decision You Can Make
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Have you ever said something like OK, if I lower
my price to 15/widget, will you buy? The
problem with discounting your price like this is
that it communicates your price is over-
inflated. And if the buyer perceives this, they
will feel compelled to negotiate until they finds
out what your true price is.
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Instead, its much better to couple any price
discounts with an equal reduction in services or
product offered. So for example, you might say
OK, I can reduce my price to 15/widget by
reducing our 5 year warranty to 3 years. This
way, youve shown flexibility in meeting the
needs of your buyer, yet have maintained your
pricing integrity.   
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Commit Your Pricing Strategy To Paper Once
youve finalized your pricing strategies, write
them down. This commits you to a plan of attack,
and gives you something to go back to when you
plan again next year. It should look
something like this
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Pricing strategy We will premium price our
products in the top third of our market.  We
will do this because it (rationale) 
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1.Positions us as higher quality than our
competition. 2.Further justifies our additional
services. 3.Ensures adequate margins now and in
the future.
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Remember pricing is a financial matter, but just
as important, its a marketing matter that
impacts your positioning, your selling abilities
and your brand. Follow the steps outlined above
and youll ensure you setand getthe right
prices.
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Figuring Costs And Profits For A Consultant
Service
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Pricing services, where your own labor or
expertise is used, is different from pricing
services that use materials and other labor. For
instance, most consultants price their services
by the hour. Senior consultants charge more for
their time than do their less experienced
counterparts.
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Remember to charge for an adequate number of
hours. Travel time is usually listed as an extra
charge. It is unlikely that all of your time
will be billed to clients. Therefore, hourly or
contract fees must be set high enough to cover
expenses during slow periods. That is why
one-half of the total normal working hours for a
given year are used in figuring overhead
rates. Try to obtain long-term, monthly, or
contract assignments when possible.
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Summary Your pricing structure and policy are
major components of your public image and are
crucial to securing and keeping your clientele
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Pricing for service businesses may be more
complex than product pricing. However, the
result is the same cost, and operating
expenses, and desired profit, equals the
service's price.
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The key to success is to have a well-planned
strategy. Establish your policies constantly
monitor prices and operating costs to insure
profit Accuracy increases profits!
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Formula A-Price Per Hour of Service. Labor
expenses per hour overhead and variable
expenses profit price per hour charged.
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Formula B-Price Per Job In lieu of charging an
hourly rate for your service, you may wish to
have a per job charge. To figure out this price,
determine the total hours to do the job, and
then add this figure to this formula. Labor
expenses per hour x hours needed to do job
overhead and variable expenses profit price
charged per job.
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Remember, the key to setting prices for your
product or service is to set them high enough to
cover all your costs and low enough to encourage
people to buy. Learning to set prices takes some
business experience. The information in this fact
sheet is presented as a helpful guide some
degree of flexibility is needed.
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I am often asked if there are any standards or
rules of thumb for setting prices for a
consulting business. There aren't really any
standards for setting the price for services
rendered, but there are some basic approaches you
can follow that will help you determine what you
want to charge.
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Here is a basic formula you can use to get
started in setting your fees P (H x B x R)
E Where P Profit on a projectH  Hours
worked B of those hours that are
billableR Your hourly rate andE Expenses.
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You should charge your profit plus your expenses
or, P E. For example, you want to make 20,000
for a job you are bidding on. You estimate it
will take 400 hours to do, of which only 300
hours can be directly billed to the project. You
estimate that your expenses will be 4000 to
complete the project. What do you charge per
hour? 20000 (400 X .75 X R) - 4000 24000
(300 X R) 24000/300hrs R R 80/hr.
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Suppose you have a set hourly rate of 80 and you
want to know how much you will make on a project.
Assume your expenses are still 4000, it will
still take you 400 hours to do the project and
only 300 hours are billable. You can use the same
formula P (400 X .75 X 80) - 4000 P
24000 - 4000 P 20000
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If you want to make more money, you have to lower
your expenses, increase your billable hours, or
raise your rates. The math here is simple.
What's hard is selecting the approach you take to
choosing the numbers you plug into the formula.
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There are 2000 working hours in a year (50 weeks
x 40 hours). Suppose that only half of that time,
or 1000 hours, is actual billable work. Suppose
also that your overhead and other expenses
are 30,000 for a year. Assume you want to make
160,000 net income. 160,000 Net
income30,000 Cost190,000 Gross income Divide
190,000 by the number of billable hours (1,000)
to get the hourly rate 190,000/1000 hrs
190/hr
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Summary Well, here we are at the end of the
presentation. You've heard the whole thing, and
just like I threatened at the beginning, you
don't have any simple answers.
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I've given you a whole bunch of guidelines and
issues to consider as you face your pricing
decision. I've said some things here which
conflict with other things I've said here.
Which issues are you supposed to consider?
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You should consider all of these issues, and
probably a few more that are specific to your
situation. Look at the decision from every
possible angle. Anything youve heard on the
subject of pricing is merely an aid to your own
judgment, not a substitute for it.
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Unfortunately, there is no such thing as the
perfect price. There is that mythical price that
gives the customer excellent bang for his buck
and the company excellent profits for its
efforts, but even that price point can't be
considered the perfect price. That's called
compromise, not perfection.
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Are Your Prices Where They Should Be? Ask
yourself the following questions regarding your
prices. Do I need to generate more revenue that I
can't achieve from product or service
improvements? Do I want a higher market share
that will lead to lower costs through higher
volume? Is the economy suffering a downturn or
a recession? Have one or more of my competitors
recently lowered their prices?  
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Are my prices set according to the quality of my
product or service as compared to that of my
competitors?   Is my revenue level suffering
because of the effects of inflation?   Is the
economy enjoying an upturn or boom? Is my
product or industry likely to be obsolete a year
from now?   Have one or more of my competitors
recently raised their prices? Is there a
greater demand for my product or service than I
can supply?
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If you answered yes to any of questions 1-5, you
may want to consider lowering your prices. If
you answered yes to any of questions 6-10, you
may want to consider raising your prices. If you
answered no to all or nearly all of the
questions, chances are your prices are at the
right level.
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