Selling your product or service is easiest if your prices are lower than your competition’s prices. But that’s not a good reason for having the lowest price. Your prices MUST cover all of your costs plus a reasonable profit. If they don’t, you will not be in business very long. If you can’t sell your product with prices that high, then you’re in the wrong business. Excellent companies rarely have the lowest prices, but they frequently have the most sales and the highest profits.
Let’s digress here and define some terms. Your Cost is how much it costs you to produce and sell your product or service. Your Price is how much you charge your customer for your product or service. Your Profit is the difference between price and cost: How much more than your cost can you charge your customer?
Cost + Profit = Price
As a general rule, the minimum price of your product or service should be its total cost plus a reasonable profit. The actual price you charge should be what your customers will pay. If your customers won’t pay at least your minimum price for a product, then you need to do one or more of these four things: Lower your costs so you can make a profit, find other customers or markets for that product, improve the product to make it more attractive, or else drop that product from your offerings. (There is a fifth alternative, that of establishing “loss leaders,” sometimes used in retail businesses as a marketing ploy, but it’s risky and mustn’t have a significant effect on your overall profit. Don’t get sucked into the hallucination of pricing a product below cost to attract customers, and then making up the losses with volume.)
Consider your competition’s prices when you set your prices. If your competition’s price is less than your minimum price, are your costs higher than they should be? Is there a way to reduce them? If your competition charges more than your minimum price, should you also charge that higher price? If your product or service offers the customer additional features or advantages, you perhaps should set your price higher than your competition.
Setting your price can be a complicated process, but all of the above factors should be considered.
In a later post we will discuss the concepts of fixed and variable costs, how they affect your break-even point, and how they may influence your pricing process.