How do I fix my prices at the right level?

04 December 2007
How do I fix my prices at the right level?

A few years ago, a guesthouse owner was asked how much his room cost for one night. A shout came from the other side of the hedge: "Whatever he said, mine are 50p cheaper." And so a price is fixed.

Many businesses seem to charge according to the market, irrespective of their own costs or other considerations, which can have dire consequences for their profitability.

There are several ways to set prices.

Cost-plus pricing The old food-and-drink favourite relies on applying a margin set at a percentage above product cost on the assumption that it will cover operating expenses and profit.

Rate-of-return pricing Deciding what percentage rate of return you want on your investment, then estimating the number of units likely to be sold, the associated costs and an amount to cover the return on investment, is another option.

Competitive pricing has already been described.

Demand pricing Price levels are varied to reflect the strength of demand.

Value pricing The price reflects the value of the product from the customer's perspective.

Maximising your revenue and profit levels requires that you take all of the above into account. You must ensure your prices cover costs and generate a return on your investment as, without that, your business has no future. There must also be an internal as well as an external focus in your pricing levels. Your business cannot be priced to meet the cost requirements of your neighbour but, on occasion, you will probably need to reflect weaker levels of demand.

Finally, you need to focus on value, for without sufficient value your customer will not buy. And if your value is too low? Try raising value before reducing prices, because pricing has a significant effect on market positioning and perceptions too.

Chris Morton Associates

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