When
was the last time you gave serious consideration to the price
you
charge? If you’re like many business owners--including some
successful ones---you probably answered, “when the
business started”, or “quite some time ago”.
Experience
suggests that smaller business owners set price infrequently.
And when they do set it, it’s without a thorough understanding
of the implications involved. As a result, they short-change
themselves by losing
out
on additional profits.
Consider
this: The price you charge has a major impact on
numerous areas of your business:
Price determines
your revenues and net profits
It affects
your market share
It has the
power to make or break a sale
It determines
whether your product or service is perceived as high or low quality
It can compliment
or destroy your advertising
It determines
which methods of advertising and promotions you choose
It differentiates
you from competitors if you sell the same or similar products
or brands
It
determines what you’ll pay for costs and expenses such
as wages, rent, office supplies, fixed assets, etc.
As
you can see, setting price is a critical element of success.
It’s so critical
in fact, that even a minor adjustment could have a dramatic impact
on your bottom line results.
That’s why it’s
so important to set a correct price. A correct price is one that
maximizes both profit and growth simultaneously.
You
can’t
set prices too high or else you’ll cut off demand. Conversely,
you can’t set prices so low that your profit margins suffer.
Price
must also be assessed regularly.
Keep
in mind that successful pricing is not an end result, but a continuous
process. If you
don’t
continually assess your prices, you run the risk of losing profits
to increasing costs, competitors, or both.
After
all, the marketplace isn't fixed. Things change all the time.
If you don’t take
a proactive approach to pricing, you allow your financial destiny
to be influenced by outside factors.
The
primary goal of any business is to make a profit. While many
factors
affect profitability---such as management, location, cost of
labor, product quality, market demand, competition and so forth---the
prices you charge have the greatest impact on your bottom line
results.
This
is because price is what determines your revenues. And profit
is
the difference between revenues and expenses.
A
few business owners, especially new business owners, feel that
they have to have
the lowest price in order to succeed. As a result, they play a
game that’s difficult to win.
While
some businesses do become gold mines because of their low prices,
setting a price
that is simply
the lowest is not prudent or advisable for most businesses.
The
fact is: many gold mine businesses charge more than their competitors
do.
Of
all the theories and conventional wisdom about setting price, I
believe the most successful are the ones that focus on factors in
the marketplace rather than on your costs.
Obviously,
if you cannot sell your product or service profitably at your
cost
level, then you shouldn't be selling it in the first place. This
is not the fault of your marketplace, but a flaw in your
business
model.
Buyers
don't care about your costs.They aren't concerned that your direct expenses are too high.
They don't care about your profit margin or mortgage payment.
What they do care about, is whether they can buy your product
at a price that brings value to THEM.Your costs are the last things on their mind.
But
this is not to say that you shouldn't use costs as a factor in determining
your price.You absolutely
should.
But
it shouldn't rule your decision. It should simply guide it.
Five
Key Factors
Setting the
right price involves evaluating each of the following five key factors:
To set a correct price for a product or service, begin by assessing
the costs needed to bring it to market. In other words, how much
is it going to cost you to produce, acquire, sell, and deliver your
product or service?
After
you’ve calculated your costs, consider the profit that you’d
like to earn.
For
example, if you’d like to earn an after
tax profit of 20%, factor that into your calculations. Simply add
your desired profit to your cost.
After
you’ve determined an initial price, you must then fine-tune
it using the remaining four key factors.
Although
I've oversimplified the process of setting the correct price
for purposes of this article,
it's important that you know how each of these factors will impact
the prices you set.
This article may be freely reprinted on your website or in your newsletter provided
you follow these instructions.
If
you'd like more information or would like to discuss this
article personally with me, please write to
me at alex@goldminetactics.com
See
below for author information.
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Some
People
Fail
in
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While
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