By Kevin Faber
One of the hardest things to do when starting a business is to figure out how to set your pricing. Businesses need to make sure that their price is in line with how they are marketing themselves. You wouldn't want to advertise "all you can eat" for an upscale bakery, just as you wouldn't charge $20 for a burger at a fast food restaurant. This post will go over the purpose of a pricing strategy and how it factors into setting prices for products or services.
Some Factors That Determine a Product Offering's Price
Your business will need to consider the financial means of its chosen target group. You will, therefore, craft your pricing strategy in part based on how they are likely to value your goods and services. You need to charge a price which your chosen target audience is both willing and able to pay. Your price that you choose should reflect the goals that you have set out to achieve with your business. This means that your price point should generate adequate income to cover your costs and make a decent profit.
A business should also consider its strategic objectives when setting its price. This includes how you want to position your product in presumably an already crowded marketplace. A business will have to look at the general market characteristics of its industry to determine where it fits in its niche.
An overview of pricing strategies
Here's are a few pricing strategies that are used by businesses when setting prices.
Cost-oriented Pricing - Set Your Price According to Your Costs
In the last section, we looked at four different ways to come up with a product's price. Here we will go in-depth on the second strategy, cost-oriented pricing.
If you have a business that sells products, then you need to take your manufacturing costs for your items into account when setting your prices. There are also additional markups that will be required by retailers and distributors. You can use an auto dialer app to make contacting these people easier. You need to figure out a price so that each party in your supply chain makes enough money. The last thing you want to do is to successfully sell your item and realize later that everyone is making money except for you. That's a quick way to go out of business. This is also why you need to look at your operating margins when setting your price.
To calculate your margins, you'll first need the per unit production cost for each of your products from the factory. You'll add to this your per unit cost for receiving and freight. Depending on how your agreement is set up, either the freight cost or the warehouse receiving cost may be included in your per unit price. If you're producing your item overseas, you will need to have your import tariff costs. You can find out your international tariff costs by going to usitc.gov.
You'll also want to know your own margin goals. Try to keep your margins above 50%. Anything lower than that will not help you create a sustainable business. You should also know your retailer's' margin requirements. This will vary by industry as well as whether you're working with mass retailers or boutique retailers (and whether there's a distributor involved).