There is more to pricing than meets eye. A surprising number of new business owners end up pricing their product or service with little more than an educated guess. There is not necessarily one ideal price for your product but there is certainly an appropriate price range that you should aim to fall into. Unfortunately, there are no hard and fast rules available to get you there but rather many different issues to take into consideration.

There are three goals that you should aim to achieve with your pricing policy:

  Getting your product accepted in the market place;

  Maintaining your market share particularly as competition increases;

  Earning a Profit.

Knowing your product’s break-even selling price is a great place to start. If you already know the profit amount that you wish to earn from selling a given number of your products you can use a simple formula to come up with the necessary minimum price:

Break-even selling Price = (Fixed Costs/Period + Desired Profit) + (Variable Costs x Quantity Produced)

Quantity Produced

This equation allows you to see the immediate effect on your price should either your fixed or variable costs change. If you find that the break-even selling price is unrealistic you can decide whether you are prepared settle for less profit, whether your costs can be lower or whether you can produce greater quantities. If none of these options are available, the product should probably be abandoned.

When introducing your product to the market there are many basis strategies to choose from:

Penetration: used if there are already many similar products in the market; you will need to start off with a low price, barely above cost. Be prepared to make low profits until you gain customer acceptance.

Skimming Leader Pricing: used when little competition already exists; you start off with a high price that will cover your start-up costs and advertising expenses with the intention of appealing to a specific group that will be willing to pay a premium. This strategy assumes that the customer will associate the high price with high quality.

Sliding-Down-the Demand-Curve: this strategy is similar to skimming in that the product is introduced at a high price when little competition exists. The high price covers the initially high start-up costs. However, prices are lowered as competition enters the market or to attract a larger customer base.

Odd Pricing: a frequently used tactic used for psychological purposes. The price is set at $19.95 versus $20.00.

Price Lining: used in conjunction with other merchandise, products are priced at three levels representing good, better, best or large, larger, largest.

Opportunistic Pricing: if your product is in great demand due to short supply you can consider charging higher prices. There is considerable risk associated with this tactic as customers may associate your product with rip-off prices and buy alternative products when they become available.

The following web sites are helpful in determining your pricing strategy and assisting you in calculating your product pricing.

http://www.pricing-advisor.com/work_tpsw.htm

• This site is an introduction to the TPA Pricing Seminar Workbook. Providing an A-Z overview of pricing strategy, the workbook guides managers in navigating through the quantitative considerations of effective product and service pricing. It analyzes the different methods of pricing in order to allow managers to have choices that best suit their pricing needs. For example, it looks at pricing based on return on assets and compares it to pricing based on value-to-price comparison.

http://aol.toolkit.cch.com/text/P03_5200.stm

• A synopsis of the major issues involved in pricing. The site provides nine clear and helpful steps to guide a manager in product pricing. Each step is a hyperlink to separate web-pages that elaborate on the pricing issue at hand. Examples listed below.

 Analyze the size and composition of your target market. http://aol.toolkit.cch.com/text/P03_5210.stm

 Research product price elasticity. http://aol.toolkit.cch.com/text/P03_5230.stm

 Evaluating your product’s uniqueness. http://aol.toolkit.cch.com/text/P03_5240.stm

 Analyzing your costs and overhead. http://aol.toolkit.cch.com/text/P03_5270.stm

 Estimating Sales at Different Prices. http://aol.toolkit.cch.com/text/P03_5280.stm

 Considering other pricing strategies. http://aol.toolkit.cch.com/text/P03_5290.stm

 Selecting final pricing levels. http://aol.toolkit.cch.com/text/P03_5300.stm

http://secure.abraxis.com/pricing-advisor/list-archive

• A pricing discussion forum of the Professional Pricing Society, the site allows users to post questions and answers to hot topics in the pricing arena. For example, one business owner writes in asking about price devaluations in the defense industry. Another asks about the disadvantages of a break-even point strategy. Forum addresses range from http://secure.abraxis.com/pricing-advisor/list-archive/00000000.htm to http://secure.abraxis.com/pricing-advisor/list-archive/00000081.htm.

http://www.pricing-advisor.com/jour_syn.htm

• This site provides abstracts of Professional Pricing Society Journal articles on all aspects of pricing. One articles is entitled, "It’s Not Rocket Science: Using Pricing To Help Build A Sustainable Business." There are also links to article abstracts in other issues.