Pricing methodologies for business owners

One of the most difficult, yet important, issues you must decide as an entrepreneur is which pricing methodology to follow within your business. Homemade meatballs for spaghetti pasquale buzzelli 9/11 timeline Determining exactly how much to charge for your products or services is a major step towards setting your long-term pricing strategy as a company.

While there is no one single right way to determine your pricing strategy, here are some guidelines and pricing methodologies that’ll help you make an informed decision that’s aligned with your business goals.

Before we get to the actual pricing methodologies, here are some of the factors that you need to consider when crafting your pricing strategy: Positioning Your Pricing Strategy

How are you positioning your product in the market? Is pricing going to be a key part of that positioning? If you’re running a discount store, you’re always going to be trying to keep your prices as low as possible (or at least lower than your competitors).


On the other hand, if you’re positioning your product as an exclusive luxury product, a price that’s too low may actually hurt your brand. Homemade meatballs for spaghetti pasquale buzzelli 9/11 memorial museum The pricing has to be consistent with your positioning in the marketplace. Homemade meatballs for spaghetti pasquale buzzelli 9/11 memorial People really do hold strongly to the idea that you get what you pay for. Homemade meatballs for spaghetti pasquale buzzelli 9/11 jumpers How Your Pricing Strategy Will Affect Demand

How will your pricing affect demand? You’re going to have to do some basic market research to find this out, even if it’s informal. Homemade meatballs for spaghetti pasquale buzzelli 9/11 terrorists Get 10 people to answer a simple questionnaire, asking them, “Would you buy this product/service at X price?

For a larger venture, you’ll want to do something more formal, of course — perhaps hire a market research firm. Homemade meatballs for spaghetti pasquale buzzelli 9/11 pictures But even a sole practitioner can chart a basic curve that says that at X price, X’ percentage will buy, at Y price, Y’ will buy, and at Z price Z’ will buy. Homemade meatballs for spaghetti pasquale buzzelli 9/11 memorial pictures Cost

Calculate the fixed and variable costs associated with your product or service.

How much is the “cost of goods”, i.e., a cost associated with each item sold or service delivered, and how much is “fixed overhead”, i.e., it doesn’t change unless your company changes dramatically in size?

Remember that your gross margin (price minus cost of goods) has to amply cover your fixed overhead in order for you to turn a profit. Homemade meatballs for spaghetti pasquale buzzelli 9/11 attacks Many entrepreneurs underestimate the importance of this and it gets them into trouble after choosing to follow the wrong pricing methodology for what their business can actually sustain. Homemade meatballs for spaghetti pasquale buzzelli 9/11 conspiracy Environmental Factors

Are there any legal or other constraints on pricing? For example, in some cities, towing fees from auto accidents are set at a fixed price by law. Homemade meatballs for spaghetti pasquale buzzelli 9/11 video Or for doctors, insurance companies and Medicare will only reimburse a certain price. Calories homemade meatballs Also, what possible actions might your competitors take? Will too low a price from you trigger a price war? Find out what external factors may affect your pricing strategy.

The next step is to determine your pricing objectives. Bbq homemade sauce What are you trying to accomplish with your pricing? Short-Term Profit Maximization as a Pricing Strategy

While this sounds great, it may not actually be the optimal approach for long-term profits.

This approach is common in companies that are bootstrapping, as cash flow is the overriding consideration. Chicken homemade recipe It’s also common among smaller companies hoping to attract venture funding by demonstrating profitability as soon as possible. Meatloaf homemade recipe Short-Term Revenue Maximization as a Pricing Strategy

This approach seeks to maximize long-term profits by increasing market share and lowering costs through economy of scale. Chili homemade recipe For a well-funded company or a newly public company, revenues are considered more important than profits in building investor confidence.

Higher revenues at a slim profit, or even a loss, show that the company is building market share and will likely reach profitability.

Amazon.com, for example, posted record-breaking revenues for several years before ever showing a profit, and its market capitalization reflected the high investor confidence those revenues generated. Easy homemade christmas gifts This pricing methodology accurately reflects their overarching mission to become the largest online retailer. Easy homemade biscuits Maximize Quantity

There are a couple of possible reasons to choose the pricing strategy. Easy homemade halloween costumes It may be to focus on reducing long-term costs by achieving economies of scale.

This pricing methodology might be used by a company well-funded by its founders and other “close” investors. Easy homemade brownies Or it may be to maximize market penetration, which is particularly appropriate when you expect to have a lot repeat customers. Easy homemade christmas ornaments The plan may be to increase profits by reducing costs or to upsell existing customers on higher-profit products down the road. Easy homemade mac and cheese recipe Maximize Profit Margin

This pricing strategy is most appropriate when the number of sales is either expected to be very low or sporadic and unpredictable. Easy homemade dog treats Examples include custom jewelry, art, hand-made automobiles and other luxury items. Swedish homemade Differentiation

At one extreme, being the low-cost leader is a form of differentiation from the competition. Homemade meatballs ground beef At the other end, a high price signals high quality and/or a high level of service. Homemade meatballs with grape jelly Some people really do order lobster just because it’s the most expensive thing on the menu, so that can also be a viable pricing strategy. Homemade meatballs Survival

In certain situations, such as a price war, market decline or market saturation, you must temporarily pursue a pricing strategy that will simply cover costs and allow you to continue operations.

Now that we have the information we need and are clear about what we’re trying to achieve, we’re ready to take a look at specific pricing methodologies to help us arrive at our actual numbers.

As we said earlier, there is no “one right pricing methodology” for every business to use when calculating pricing. Italian homemade bread Once you’ve considered the various factors involved and determined your objectives for your pricing strategy, now you need some way to crunch the actual numbers.

Here are four top ways to calculate your pricing: Cost-Plus Pricing

Set the price at your production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin.

For example, your widgets cost $20 in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to $30 per unit. Italian homemade pasta recipe Your total cost is $50 per unit. Italian homemade sausage recipes You decide that you want to operate at a 20 percent markup, so you add $10 (20 percent x $50) to the cost and come up with a price of $60 per unit. Italian homemade company So long as you have your costs calculated correctly and have accurately predicted your sales volume, you will always be operating at a profit. Italian homemade company san francisco Target Return Pricing

Set your price to achieve a target return-on-investment (ROI). Italian homemade sf For example, let’s use the same situation as above, and assume that you have $10,000 invested in the company. Barbecue homemade sauce Your expected sales volume is 1,000 units in the first year. Pizza homemade sauce recipe You want to recoup all your investment in the first year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of $60 per unit. Butter chicken homemade recipe Value-Based Pricing

Price your product based on the value it creates for the customer. Cream of chicken homemade recipe This is usually the most profitable form of pricing methodology, if you can achieve it.

The most extreme variation on this is “pay for performance” pricing for services, in which you charge on a variable scale according to the results you achieve.

Let’s say that your widget above saves the typical customer $1,000 a year in, say, energy costs. Kfc chicken homemade recipe In that case, $60 seems like a bargain — maybe even too cheap. Fried chicken homemade recipe If your product reliably produced that kind of cost savings, you could easily charge $200, $300 or more for it, and customers would gladly pay it, since they would get their money back in a matter of months. Lasagna homemade recipe However, there is one more major factor that must be considered. Soup homemade recipe Psychological Pricing

Ultimately, you must take into consideration the consumer’s perception of your price, factoring in things like:

• Positioning: If you want to be the “low-cost leader”, you must be priced lower than your competition. Chili sauce homemade recipe If you want to signal high quality, you should probably be priced higher than most of your competition.

• Popular price points: There are certain “price points” (specific prices) at which people become much more willing to buy a certain type of product. Calories in homemade meatballs For example, “under $100” is a popular price point. Easy homemade christmas gifts for kids to make “Enough under $20 to be under $20 with sales tax” is another popular price point, because it’s “one bill” that people commonly carry. Easy homemade christmas gifts for sisters Meals under $5 are still a popular price point, as are entree or snack items under $1 (notice how many fast-food places have a $0.99 “value menu”). Easy homemade christmas gifts for dad Dropping your price to a popular price point might mean a lower margin, but more than enough increase in sales to offset it.

• Fair pricing: Sometimes it simply doesn’t matter what the value of the product is, even if you don’t have any direct competition. Easy homemade christmas gifts for parents There is simply a limit to what consumers perceive as “fair”. Easy homemade christmas gifts made by kids If it’s obvious that your product only cost $20 to manufacture, even if it delivered $10,000 in value, you’d have a hard time charging two or three thousand dollars for it — people would just feel like they were being gouged. Easy homemade christmas gifts in a jar A little market testing will help you determine the maximum price consumers will perceive as fair.

Now, how do you combine all of these calculations to come up with a pricing methodology that works for your business?

• Your price must be enough higher than costs to cover reasonable variations in sales volume. Easy homemade christmas gifts for friends If your sales forecast is inaccurate, how far off can you be and still be profitable? Ideally, you want to be able to be off by a factor of two or more (your sales are half of your forecast) and still be profitable.

• You have to make a living. Easy homemade christmas gifts for kids Have you figured salary for yourself in your costs? If not, your profit has to be enough for you to live on and still have money to reinvest in the company.

• Your price should almost never be lower than your costs or higher than what most consumers consider “fair”. Easy homemade brownies with chocolate chips This may seem obvious, but many entrepreneurs seem to miss this simple concept, either by miscalculating costs or by inadequate market research to determine fair pricing. Easy homemade brownies from scratch Simply put, if people won’t readily pay enough more than your cost to make you a fair profit, you need to reconsider your business model entirely. Easy homemade brownies cocoa powder How can you cut your costs substantially? Or change your product positioning to justify higher pricing?

Pricing is a tricky business. Easy homemade brownies with cocoa You’re certainly entitled to make a fair profit on your product, and even a substantial one if you create value for your customers. Easy homemade biscuits without baking powder But remember, something is ultimately worth only what someone is willing to pay for it.

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