52. How do you set your price?
You may have little choice. If your market facts tell you that all your competitors are selling the same item at one dollar, and if one dollar is the absolute least you can charge and still survive, then the decision makes itself. This, however, is rare; you usually have some flexibility.
Your price (less costs) sets your gross profit--at least on that one sale. Very few businesses, of course, can survive on just one sale. So your gross profit, in actuality, is based on your price, multiplied by your number of units of sale, minus your costs.
Some customers buy on price alone, or with price as a key factor. A very few ignore price completely. Most seek the greatest value, real or imagined, per dollar. This factor is usually known as "perceived value." The "ceiling" and the "floor" are terms that describe the highest and lowest possible price decisions you can make. Your ceiling might be what your competition is offering; your floor might be the lowest price you can charge and still turn a profit.
Sometimes, you may wish, briefly, to sell near or below your cost, in order to get customers to try your product or service. Eventually, of course, you must sell above your cost in order to build gross profit--that is, the dollars that allow you to keep your business in operation.
If you are more efficient than your competitor, you might sell below their price and still generate enough income to pay all your other costs and still end up with a net (or bottom line) profit. If you do sell below your competitor's price, you will probably aim to sell enough extra units to make up for the lost income from lower price. Your gross will very likely be lower than the competitor's on each individual sale. By the same token, higher real or perceived value can let you sell above your competition's price. This can cut your number of units sold just as a lower price raised them. However, if you can compensate for the reduction by the extra dollars you will see with a higher price, income goes up.
Pricing should be a window, not a barrier. For instance, volume discounts to key larger customers usually increase your efficiency and profitability, and thus represent a reasonable basis for a price reduction.
Clearly, your decision can be a little tricky. Your price should probably be somewhere between your cost and your competitor's price. If you decide to charge more than a competitor, you need to have reasons that justify the higher price and/or a superior product or service.
Comments:
In the final analysis, the company that can control costs will always control the market.
Jim Ruth
“Different strokes for different folks” is an old saying that goes pretty well when it comes to pricing your customers. It all depends on how much competition you have in the various accounts and what their pricing structure is. In some accounts it may be easy to get your full book price and in others you may have to discount prices in order to stay competitive. The most important thing is the overall picture and to keep in mind that without profits there is no commissions.
Phil Hackett
A company I sold for competed against the industry leader for many years and customers would pay a large premium just for the name on the product. Over the years we were able to increase our good reputation while offering a much better value for the dollar. We did not make much profit but our market share steadily rose and the competitor was forced to start lowering prices. Eventually the prices became almost the same but our market share continued to increase. We slowly began increasing our gross profit and the trend continued. Even though they continued to be the market leader, we closed the gap and made more money.
Crocker Smith
Setting your price on your product is based on the quality and performance that your product provides. If your price is higher that the competition, you have to be able to justify why. You have let the buyer see what and how much they are getting for there money and how much better it is that the other guys. Remember, you get what you pay for!!
David Bradley
Either way you will have to work hard to make sales. If you charge more for a product you will have to work hard to show the clients the features and benefits of your product over competitors. If you charge less then you have to make more sales calls to make the up the difference in sales numbers.
Brian Spraggins
Prices should not be set in stone. I believe that making sales would be very difficult if there was absolutely no negotiating. I work in staffing so it is a little bit hard to be flexible on my price. The biggest area we can flex is when it comes to the quantity of business they project to do with us. If they will be doing consent business with us then we can charge them at a lower percentage whereas someone that wanted to do business with us for 2 weeks we would need to charge more. Price should be flexible but you shouldn’t break yourself to get a sale.
Matthew Thacker
You pretty much educate your customers and the price should fit in. I totally agree that the best and safest way to set your prices is by comparing your prices with your competitors and to make sure that is not lower than your cost. By doing that, you will make sure that you are not under pricing your product or services.
Yessenia Narvaez
When considering a reduced price I feel it is important to calculate how it will affect your profit. If the volume makes up the difference then that would be one thing. On the other hand to get your foot in the door I would never reduce below a competitor because it runs the risk of being stuck in that fee range long term or the word on how cheap you are will be generated through out referrals which will expect the same reduction.
Carla McCrea
Well, if we’re talking about a competitive situation where the customer is giving you an opportunity to get the business based on price then the trick is to try to determine where that point is…you don’t want to leave money “on the table,” so to speak. Often the customer will tell you what they are paying, and in such cases I try to come up with a price that satisfies the “perceived value” for the customer, and allows me to make a profit.
Jonathan Kendig
Well selling low at first then hoping that eventually you can sell for higher is a great thought in theory. But in all actuality it seems that people want the discounts after buying initially. We can get a contract at a high rate and then I have seen it over and over, after a few months the competition comes in and tries to underbid us, and then our phone rings well so and so can do it for this can you match or we will switch to ABC Company. That is so frustrating.
Morgan Frazier
"Pricing should be a window, not a barrier. For instance, volume discounts to key larger customers usually increase your efficiency and profitability, and thus represent a reasonable basis for a price reduction."