The Right Price for Your Product or Service

 

              By Richard Albert

 

 

              Determining what your customers will pay for your product or service is a critical

              marketing decision for your home-based business. The right price for your

              product or service should be commensurate with the perceived value of the

              product or service, or you will drive customers to competitors for their product or

              service. Whole- sale and retail prices, discounts, allowances, and credit terms are

              key considerations.

 

              You set prices when 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 home-based 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.

 

 

              Each of these steps is described below.

 

              SELECTING THE PRICING OBJECTIVE

 

              First decide how you want your price to position your home-based business.

              Con- sider 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 home-based 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 costs of producing,

              distributing, and selling the product or service, including a fair return on effort and

              risk. Con- sider the following costs:

              Cost Per Unit of product. This is a variable cost that is duplicated 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. Learn the price

              and quality of each competitor's product or service by sending out comparison

              shoppers to price and compare. Acquire com- p- etitors' price lists and buy

              competitors' products and analyze them. Also ask customers how they perceive

              the price and quality of each competitor's product or service. If your product or

              service is similar to a major competitor's product or service, then you will have to

              price close to the competitor or lose sales. If your product or service is inferior,

              you will not be able to charge as much as the competitor. Be aware that

              competitors might even change their prices in response to your price.

 

              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. The specific price for your product or service will be between one

              that is too low to produce a profit and one that is too high to produce any

              demand. The various types of pricing methods are listed below.

              Cost-plus Pricing Method: Focus on adding a standard mark- up to the cost of

              a product.

              Target-Profit Pricing Method: Determine the price that would produce the

              profit you are seeking.

              Perceived-Value Pricing Method: Base your price on the product's or

              service's perceived value. You use the customers' perception of value, not your

              costs, as key in this pricing.

              Going-Rate Pricing Method: Base the price of your product or service largely

              on competitors' prices, with less attention on your own costs or demand.

              Competitive-Oriented Pricing Method: When you bid for contract work, the

              competitive-oriented pricing method is appropriate. You base the price for your

              home-based services on the expectations of how competitors will price rather

              than on a rigid relation to your costs or demand. HBM