Pricing your product or service april 27,2009

Pricing your product or service

JERRY R MITCHELL 1 April 27,2009

In business, few decisions are more crucial than the price
you charge for your product or service. Interestingly,
research indicates that many owners of businesses and
professional practices under price their products and
services.


In theory it might seem that only the seller offering the
product or service at the lowest price ought to do any
business. But in reality, the highest priced seller might be
moving the greatest number of units.


As a general principle, you should charge as much as possible
for your merchandise or services. But there are dozens of
factors (kind of customer you want to appeal to, competition,
selling for cash or credit, your willingness to accept returns,
guarantees) to examine before you can figure out your best
prices.


You can offer the lowest prices possible, but to do so you
will probably give up amenities that others in your
industry offer: personal attention, delivery service, prompt
replacement of defective merchandise, unquestioned
refunds, and/or easier credit terms.


If you don't offer such service, be prepared to lose
shoppers who want it and are willing to pay for it. Many
businesses fail to realize that, with low-cost competitors,
it's often more effective to position a product/service
higher upscale than it is to cut the selling price.


For Example:

Japanese motorcycles are priced around 25 percent under
Harleys. But Harley-Davidson stresses custom styling,
American origin and the mystique of a powerful road
machine. The image is reinforced by heavy advertising and
the customers' club. The message? Only Harley offers the
real thing - anything else is a cheap substitute.


Lower than average prices generally fail to increase sales
enough to raise profits if any of the following are true:
• You fail to advertise low prices widely
• Items are rarely bought
• Customers lack a clear basis for comparison
• Luxury items are involved


There are many ways to price a product. Let's have a look at
some of them and try to understand the best policy/strategy in
various situations.


Product pricing is hard. There is no magic formula that will determ
the best price for your product. I can't provide any easy answers, b
I can give you some things to think about as you make your pricing
decisions. In the end, you will just have to make a decision using y
own judgment. There will be times you will wonder if you made the
right decision. You may never know for sure.


Let us first say that our goal is to find the price at which profit is
maximized. If we say that a price is "too high" or "too low," we
are saying that our profit could have been greater if we had set
the price either lower or higher.


You set prices when you develop a new product or
service, when you market to new customers, and when
you bid on new contract work.


Follow these six steps when setting a price for your
business' product or service:
1.Select the pricing objective for your product or
service.

• 2.Determine the demand for your product or service.

• 3.Estimate the costs for your product or service.

• 4.Analyze your competitors' prices, products and
services

• 5.Select a pricing method for your product or service

• 6.Select the right price for your product or service.


SELECTING THE PRICING
OBJECTIVE.


First decide how you want your price to position your business.
Consider pursuing one of the following four major objectives
through your pricing:


1. Survival, if your business is plagued with overcapacity,
intense competition, or changing consumer wants.


2. Maximum current profit


3. Market-share leadership, if owning the largest market share
will result in your business enjoying the lowest costs and
highest long run profit (achieved by setting prices as low as
possible).


4. Product-quality leadership (achieved by charging a high
price to cover the high quality of your product or service).


DETERMINING DEMAND.

Each price you charge for a product or service leads to a
different level of demand. Therefore, demand largely sets a
ceiling to the price you can charge for the product or service.


ESTIMATING COSTS.

Costs set the floor for your pricing. The price must cover all
costsof producing, distributing, and selling the product or
service, including a fair return on effort and risk.


Consider the following costs:

Cost Per Unit of product. This is a variable cost that is
duplicate with every unit of product sold. It includes:


•Cost of the product
•Order processing
•Shipping and packaging
•Postage to mail the product
•Overhead and an allowance
for bad debt


Campaign and Overhead Costs.

These are fixed costs that vary little with changes in the
number of products sold. These include:


•Printed materials (cover letter, brochure, etc.) for a direct mail
piece
•Mail preparation to stuff envelopes, sort and mail a direct mail
piece.
•Postage to send mail pieces
•Advertising costs for display and classified ads.
•Other marketing costs such as telemarketing, card decks, the
Internet, etc.
•Overhead costs such as accounting and office expenses


ANALYZING YOUR COMPETITOR'S PRICES, PRODUCTS
AND SERVICES.

While demand sets a ceiling and costs set a floor to pricing,
competitors' prices provide an in between point you must
consider in setting prices.


Several pricing strategies are available to
you to seek an advantage over the
competition:


1.Price-discount strategy: Offer customers a product or service
comparable to the leading competitors at a lower price.

2. Cheaper-goods strategy: Offer customers an average- or
low-quality service at a much lower price.

3. Prestige-goods strategy: Launch a higher-quality product or
service and charge a higher price than the leading competitor.


SELECTING A PRICING METHOD.

Given the demand, the costs, and competitors' prices,
you are now ready to select a price.


Price is a promise.

Each time a buyer chooses a product, they match up a price
with its promises. So, as the owner of a small business, it is
your job to understand what are the price and promises for
your service.


Determine your promises .

As you set your prices (or consider raising them), take stock
of all the value factors that go into your price. What
attributes of your product or service are noteworthy? Below
are some examples of value factors that go into a product’s
or a service’s price:


For a product:

•Quality of the raw materials
•Finished product performance
•Packaging
•On-time delivery
•After-sale service


For a service:

•Experience level of the service provider
•Bottom-line impact of the final deliverable
•Appearance of the service provider
•Turnaround time on phone calls/emails
•Ability to meet deadlines


As you can imagine, your ability to deliver various factors,
over and above your competitors, directly impacts the prices
you set and get. If you promise certain factors, yet fall short
on delivering them, your price will be challenged through
customer complaints, delayed payments or customer
defections.


Explore Pricing Methods.

Use a variety of ways to arrive at your price.


One big mistake I see small business owners make is using only
one method to calculate their prices. But, what if your calculations
are wrong? Then, you are stuck with a bad price. Instead, I
suggest that businesses use several different methods to
calculate their prices.


Method No. 1 –Costing out a price .


This first method takes into account your costs, your desired
profit, and then totals. These indirect costs cover everything
you need to keep your business operating every day,
whether or not you make any sales. After you’ve uncovered
what all your direct and indirect costs are, add them up.
.


One person I know sells ad specialties (custom-t/shirts),
so lets use them for our next example.


Just for fun, let’s say they estimate they can sell 20,000 t-shirts
in a year. They know that their expenses will be $100,000 on this
transaction.


Dividing their $100,000 in expenses by the 20,000
quantity, you end up with a breakeven of $5.00/t-shirt.
This breakeven price is the lowest price you can charge
and still cover all your costs.


The next step is to ask yourself what profit you want. Let’s say
you’d like to have $100,000 to live on during the year. This is
your profit.

OK, now take that $100,000 and divide it by the 20,000 t-shirts
you expect to sell, and you come up with $5.00/t-shirt. Add this
to your $5.00/t-shirt cost and the price you should charge is
$10/t-shirt.


Method No. 2 – Pricing competitively .


After you’ve established your cost-based price, you want to
compare this price against market prices. These are prices your
competitors are already getting, and are a key determinant of
your own pricing.


Finding competitive information isn’t all that hard; it just
takes a little creative work. If I were an ad specialty sales
person like in the example above, I would visit 5 other
t-shirt shops and inquire about their pricing.


Then I’d ask myself do they offer the same quality t-shirts as my
current supplier? If their prices are higher, what else are they
offering to justify the price? If their prices are lower, is their
product quality (or service) noticeably lower? This kind of
competitive surveillance is crucial when determining your prices.


Now, what if you are in a business-to-business market,
a service? Here are some common sources of informat
competitive prices:

•Your preferred customers who can supply you with price sheets f
competitors.

•Trade associations who might monitor pricing among the trade.

•Job candidates interviewing with your company—who come from
competitors.


Pricing Mistakes and How to Avoid Them.


The Worst Pricing Decision You Can Make.

When you think,” We need the work. For now, we’ll set our
prices really low. Then, as we get more business, we’ll raise
our prices, alarm bells should go off. This is one of the worst
marketing mistakes you can make.


Why? Because you’ll struggle from the outset just to cover
your costs. And, even if you do have some profit left over,
you’ll resent working so hard for such a little payoff.


You’ll also position your company as lower in quality versus
most of your competitors (whether or not it is true). Avoid this
situation at all costs and price your service right the first time.


Why It’s Better To Make A Mistake On The Side Of
Higher
Pricing


If you have two price points you are considering, but are unsure,
which is right, choose the higher one. This will position you as
higher quality and will ensure adequate profitability from the
beginning.


And should you meet resistance at this price, you can discount
down to an acceptable price. The alternative is choosing a
too-low price, which leaves no room for negotiation…or profit.


The Second Worst Pricing Decision You Can Make


Have you ever said something like “OK, if I lower my price to
$15/widget, will you buy?” The problem with discounting your
price like this is that it communicates your price is over- inflated.
And if the buyer perceives this, they will feel compelled to
negotiate until they find out what your true price is.


Instead, it’s much better to couple any price discounts with an
equal reduction in services or product offered. So for example,
you might say “OK, I can reduce my price to $15/widget by
reducing our 5 year warranty to 3 years.” This way, you’ve
shown flexibility in meeting the needs of your buyer, yet have
maintained your pricing integrity.


Commit Your Pricing Strategy To Paper

Once you’ve finalized your pricing strategies, write them down.
This commits you to a plan of attack, and gives you something
to go back to when you plan again next year. It should look
something like this:


Pricing strategy:

We will premium price our products in the top third of our
market.

We will do this because it (rationale):


1.Positions us as higher quality than our
competition.

2.Further justifies our additional services.

3.Ensures adequate margins now and in the
future.


Remember pricing is a financial matter, but just as important,
it’s a marketing matter that impacts your positioning, your
selling abilities and your brand. Follow the steps outlined
above and you’llensure you set—and get—the right prices.


Figuring Costs And Profits For A Consultant Service


Pricing services, where your own labor or expertise is used, is
different from pricing services that use materials and other
labor.

For instance, most consultants price their services by the hour.
Senior consultants charge more for their time than do their less
experienced counterparts.


Remember to charge for an adequate number of hours. Travel
time is usually listed as an extra charge.

It is unlikely that all of your time will be billed to clients. Therefore,
hourly or contract fees must be set high enough to cover
expenses during slow periods. That is why one-half of the total
normal working hours for a given year are used in figuring
overhead rates.

Try to obtain long-term, monthly, or contract assignments when
possible.


Summary

Your pricing structure and policy are major components of
your public image and are crucial to securing and keeping
your clientele


Pricing for service businesses may be more complex than
product pricing. However, the result is the same: cost, and
operating expenses, and desired profit, equals the service's
price.


The key to success is to have a well-planned strategy.
Establish your policies; constantly monitor prices and
operating costs to insure profit

Accuracy increases profits!


Formula A-Price Per Hour of Service.

Labor expenses per hour + overhead and variable
expenses + profit = price per hour charged.


Formula B-Price Per Job

In lieu of charging an hourly rate for your service, you may
wish to have a per job charge. To figure out this price,
determine the total hours to do the job, and then add this
figure to this formula.

Labor expenses per hour x hours needed to do job +
overhead and variable expenses + profit = price charged
per job.


Remember, the key to setting prices for your product or service
is to set them high enough to cover all your costs and low
enough to encourage people to buy. Learning to set prices
takes some business experience. The information in this fact
sheet is presented as a helpful guide; some degree of
flexibility is needed.


I am often asked if there are any standards or rules of thumb
for setting prices for a consulting business. There aren't really
any standards for setting the price for services rendered, but
there are some basic approaches you can follow that will help
you determine what you want to charge.


Here is a basic formula you can use to get
started in setting your fees:

P = (H x B x R) – E

Where:
P = Profit on a project;
H = Hours worked;
B = % of those hours that are billable;
R = Your hourly rate; and
E = Expenses.


You should charge your profit plus your expenses or, P + E.
For example, you want to make $20,000 for a job you are
bidding on. You estimate it will take 400 hours to do, of which
only 300 hours can be directly billed to the project. You
estimate that your expenses will be $4000 to complete the
project. What do you charge per hour?

$20000 = (400 X .75 X R) - $4000
$24000 = (300 X R)
$24000/300hrs = R
R = $80/hr.


Suppose you have a set hourly rate of $80 and you want to
know how much you will make on a project. Assume your
expenses are still $4000, it will still take you 400 hours to do
the project and only 300 hours are billable. You can use the
same formula:

P = (400 X .75 X $80) - $4000
P = $24000 - $4000
P = $20000


If you want to make more money, you have to lower your
expenses, increase your billable hours, or raise your rates.
The math here is simple. What's hard is selecting the
approach you take to choosing the numbers you plug into the
formula.


There are 2000 working hours in a year (50 weeks x 40
hours).
Suppose that only half of that time, or 1000 hours, is actual
billable work. Suppose also that your overhead and other
expenses are$30,000 for a year. Assume you want to make
$160,000 net income.

$160,000 Net income
+30,000 Cost
$190,000 Gross income
Divide $ 190,000 by the number of billable hours (1,000) to get
the hourly rate:
$190,000/1000 hrs = $190/hr

Sell Your Own Product via the Net


If there is one thing I have learned trying to make money
online, it is this: you will succeed if you have your own
unique product...


This might be your own e-book or even a tangible product
that you think might sell well on the Internet. As you
probably know, information is what sells best online


Do YOU have unique information or a very specific area of
expertise? Even if you answer "yes", you must also ask
yourself: Is there an online market for my product/service?
Otherwise, you may be putting forth a lot of wasted time.


Ask yourself:

What do I know better than anyone else?
What can I offer online that would be of value to a
specific group of customers?
Can I make things with my hands or with tools?
Can I write well?


What did I do in the offline world?
Can any of this expertise be translated to the Internet?
As mentioned above, information is the best-selling online
item today. It will probably remain this way for the
foreseeable future.


Perform a survey:

Hopefully, you already have newsletter subscribers or
some sort of opt-in list. If so, you can simply send a survey
to each one of them. Make it very simple, just yes or no
answers.


Ideally, just have them be able to click on one link for
"yes", and another link for "no". Try not to ask more than
five questions. Keep your language simple. A lot of my
newsletter subscribers are not from the United States.


If you are just starting out, you may have to find
an ezine that relates to your product or service.
Then write to the ezine publisher and tell him
what you need. He might let you run your survey
in his ezine, charging you his usual ad cost. He
might even help you with the formatting. Best of
all, he might send it out to each of his subscribers
as a single ad. They might think he is offering the
survey.


They will be much more likely to answer a survey that
seems to be coming from their publisher, someone they
know and trust.

If you are lucky, you will get enough responses to come to
a logical conclusion. You need at least 25(this is very
minimum). If you don't get at least this many, try another
ezine. Once you have all your responses together, throw
out any widely divergent answers.


Here's another way to do the same thing. Start
your own ezine and advertise it in one of those
"pay for subscribers" places like
(newslettersforfree.com). You can pay as low as
0.16/subscriber. If you do this, make sure your
description is accurate and interesting. This is BY
FAR the fastest way to build your own true double
opt-in list. One more thing, be sure to let Topica
sponsor your newsletter. It's only about $100/year,
but it's well worth it.


If you ask how much people would be willing to pay for
your products, and most answer in the range of $50-$60,
then this is a range you can trust. You must throw out the
two guys willing to pay $80 and $100, as well as the three
persons who would only pay $25, $30, and $35. With these
five divergent opinions, I am assuming you have at least
20 persons willing to pay $50-$60 for your
product/service.


Customers want the best value for their money, and thus
they will almost always do a quality comparison and make
purchases based on the best price for the best value. To
illustrate, put yourself in your customer's position.


• Suppose you go into an office-supply store to buy
a ream of paper for your printer, and you find that
there are dozens of options to choose from. As you
scan the shelves, you notice that most reams cost
about $7.99, but you notice one ream for $5.99.
You may be tempted to pick it up, but if you're
like most consumers, you automatically think to
yourself, "Why is this so cheap? Maybe the
quality isn't as good, and maybe it will jam my
printer. Or maybe the ink will bleed through." To
ease your mind, you likely buy one of the higher-
priced reams.


As with most rules, however, there are exceptions
when it comes to pricing. For example, if you
have a product or service that is in exceptionally
high demand, you will usually be able to get away
with selling it at a higher price. Remember a few
years back when Mazda came out with the Miata,
and the little sports car sold like hotcakes?


Mazda was able to capitalize on that boom
and raise the car's price because the demand
was so great that consumers were willing to
pay the extra money. Similar circumstances
happen every year around Christmas with
must-have toys for children, as was the case
with Cabbage Patch Dolls in the late '80s
and Tickle-Me Elmo's in the 1990's. When
you have such products that are "all the
rage," you can set your own prices.

Another time you may get away with overpricing is if your
product or service is perceived by the public to be worth
more because of your company's brand name. For
example, a bottle of perfume may have $10 worth of
perfume in it, but add the name "Calvin Klein" or "Chanel"
to the bottle, and suddenly the perfume sells for $50. These
are situations in which the highest-priced products will be
purchased by status-seeking consumers because of their
perceived value, whether it is a reality or not


Additionally, if you are in an industry where the products
change quickly, such as high-tech, you may have to set
prices a little higher, knowing that you only have a small
window of opportunity in which to sell. The computer
industry is a prime example of this: What is on the market
today may well be defunct in a year or two. Thus, this is
one of those rare cases where you may have to overprice in
order to sell quickly and make a profit.


Remember this golden rule when setting prices:
perception is everything. How customers view
your product or service and what they are willing
to pay for it is based upon those perceptions. In
the end, customers will tell you loud and clear
through their purchasing behavior whether or not
your prices are too high, too low or right on the
money.


Stickiness -- this is customer loyalty with a twist. Once
someone buys from you, does it quickly become too costly
for her to switch to a competitor? The costlier it is to
switch...the stickier is your product.


Shaver handles used to be expensive. And they only fit a
certain brand of blade. The cost of switching to another
brand was the cost of buying another expensive handle, so
customers had to continue to buy expensive refills. Hence
that old phrase... the "razor-and-blade" strategy.


Consider free Web site hosts like Geocities. Once you
build a site, it becomes tough to move it elsewhere. Also,
the amazingly cheap online brokers are remarkably
"sticky" -- it takes a while to learn a system and set
everything up. Once you do that, you don't want the hassle
of switching.


Summary

Well, here we are at the end of the presentation. You've heard the
whole thing, and just like I threatened at the beginning, you don't
have any simple answers.


I've given you a whole bunch of guidelines and issues to
consider as you face your pricing decision. I've said some
things here which conflict with other things I've said here.

Which issues are you supposed to consider?


You should consider all of these issues, and probably a few more
that are specific to your situation. Look at the decision from every
possible angle. Anything you’ve heard on the subject of pricing is
merely an aid to your own judgment, not a substitute for it.


Unfortunately, there is no such thing as the perfect price. There
is that mythical price that gives the customer excellent bang for
his buck and the company excellent profits for its efforts, but
even that price point can't be considered the perfect price. That's
called compromise, not perfection.


Are Your Prices Where They Should Be?
Ask yourself the following questions regarding your prices.

1)Do I need to generate more revenue that I can't achieve from
product or service improvements?

2)Do I want a higher market share that will lead to lower costs
through higher volume?

3)Is the economy suffering a downturn or a recession?

4)Have one or more of my competitors recently lowered their
prices?


5)Are my prices set according to the quality of my product or service
as compared to that of my competitors?

6)Is my revenue level suffering because of the effects of inflation?

7)Is the economy enjoying an upturn or boom?

8)Is my product or industry likely to be obsolete a year from now?

9)Have one or more of my competitors recently raised their prices?

10)Is there a greater demand for my product or service than I can
supply?


If you answered yes to any of questions 1-5, you may want to
consider lowering your prices. If you answered yes to any of
questions 6-10, you may want to consider raising your prices.
If you answered no to all or nearly all of the questions, chances
are your prices are at the right level.


Email jerry@jerryrmitchellandassoc.com

Web www.jerryrmitchell.com

Blog http://jerryrmitchellblog.com

Register for my newsletter send a blank
message to bootstrappingjrm-on@mail-list.com


Pricing your product or service april 27,2009

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