Determining “Right” Prices
March 23rd, 2006 | BusinessEntrepreneur magazine wrote at least three common methods for setting prices for a new business, or for a new product or service within an existing business.
First is cost-based pricing. Set your price as a multiple of cost, or cost plus a determined amount. An example would be a book store selling each book for 150 percent of whatever amount the store paid for it. Another example is a clothing boutique selling items for twice what it paid to buy them.
Another one is value-based pricing. Base your price on what your product and service is worth to the buyer. Computer software, for example, is often priced according to the time-savings and productivity gains, rather than the direct cost. Some would say airlines use a value basis to price the same flight differently for different travelers; they’re cheaper for budget-minded consumers who buy with a lot of advance notice, and more expensive for the business traveler who has to go somewhere today.
And the last: market-based pricing. Let the market determine the price. This is the most common and most realistic pricing method for small and medium businesses. If everybody else charges $15 for a haircut, you charge $15 for a haircut, or some price related to $15 depending on your strategy. Maybe you want to be a low-cost provider, for example, so you charge less (which leads us to that very common pricing error).
Comments
April 29th, 2007 at 2:05 pm
You are right, market-based pricing is the most common, however the most dangerous. Many companies just to this because they lack of efficient cost accounting. At the end of the year it is more or less a surprise whether they made a profit. In my opion, every pricing decision has to start with the associated costs. You have to know that.