Pricing Your Products or Services 6

How do I determine the best selling price for products?

Here are several methods to help you decide what to charge for your products.

Base the selling price on cost per unit:

1. Estimate how many sales of the individual product (number of units) you will make within 3 to 6 months or some other given time frame,
2. Add up all the business costs you will incur to produce and sell the product and run the business during that time frame.
3. Divide the total expected costs by the expected number of sales. This will tell you what your costs are per sale (unit cost).
4. Determine the profit you want to make on each sale (per unit) and add the profit (plus an allowance for income and self-employment taxes) to the unit cost. This will give you the minimum price you will need to get for each product to cover your costs and provide a profit. If you sell directly to your customers this would also be the minimum selling price.
5. Determine what discounts you will need to offer distributors or others and any commissions you will need to pay to independent sales representatives. (Distributor discounts are figured as a percentage of a product's retail list price. Thus if the list price of a widget is $2, and the distributors in your industry expected a 50 percent discount off the list price, the actual amount of the discount would be 50 percent of $2, or $1. Sales representatives' commissions are generally calculated on the selling price, not the retail list price.)
6. Add the discount and/or commission amount to the total cost per unit to arrive at a retail price.
7. Compare the price you determine with the list prices of similar products or products aimed at a similar market. If your price seems much higher, go back and look for ways to reduce your costs.


Decide on a retail price and work backward

from the expected retail price, subtracting distributor or other discounts, sales commissions, and your profit. This will give you a cost per unit. If you can't manufacture the product at this cost per unit, change the retail price and work out the figures again.

Calculate your break-even point.

You don't need to be a mathematician to calculate break-even points. The break-even point is simply the number of sales you need to make at a given price to cover your costs. To determine break-even points, you divide your total costs by the selling price of the item. Your answer represents the number of products you have to sell at the stated price to pay back your costs (break even). If the number of sales you will need is larger than what you might realistically expect to achieve in a reasonable time, look for ways to lower your costs, or consider raising your price per unit.

If you can't easily produce your product in volume, if there is only a very limited market for what you sell, or if you have only a shoestring budget and can market to only a small fraction of your potential market, you will want to shoot for higher selling prices to achieve a lower break-even point.
For example, suppose you make decorative wooden wall plaques and sell them once a month at craft shows. This is a sideline business, and you can make only about thirty plaques a month at a total cost to you of $360. To calculate your breakeven point (the number of plaques you would have to sell just to pay your costs), you would take one or more possible selling prices and divide the selling price into the total cost figure.

Looking at the figures, you would immediately see that at $12 per plaque you would have to sell every single one just to pay back your costs, and that to make a decent profit, you would have to price the plaques at the upper dollar amounts. If you frequent craft shows (and you should if you expect to sell at them), you will have some idea about whether or not items similar to yours sell in the higher price ranges. If they typically don't sell for much more than $15, you will have to decide whether it's worth your while to make and sell the plaques.

How do I find out what my competitors are charging?

If you aren't sure what your competitors are charging, either call and ask for prices and product literature; go to retail stores or other sales outlets and price similar products; look through catalogs, magazines, and newspaper ads (don't forget the classified section); or call or contact potential customers and do a survey to find out where they now buy what you plan to sell and how much they pay for it. See if your competitor has a web site, too. If they do, look through the site to see if they have a price list posted. Sign up for any free newsletters. They may send out announcements about pricing changes.

What should I do if my price estimates indicate that I will need to charge more than my competitors?

Basically you have several options:

• Look for ways to cut costs. Consider using less expensive materials, different manufacturing methods, cheaper labor, cutting overhead expenses, or automating jobs to eliminate them.
  
• Target the cream of the crop (skimming method). Look for ways you can add value to your product or imply added value (better grade of materials used in manufacture, more capabilities than competitor's products, etc.), and target your product at the top end of the market. You will need to know the market for your product well enough to make a good estimate about how many sales you could make at premium prices. Multiply the selling price by the expected number of sales, and compare to the cost of sales.
  
• Consider different distribution methods. Calculate the cost and possible effects of different distribution methods. Would the additional volume a distributor could achieve offset the discounts or the commissions you'd have to give and allow you to sell the product at a lower price? Might independent sales representatives have more industry contacts and thus be able to sell your product or service to more customers who are willing to pay a premium price for what you sell? Could you reduce costs and retail price by selling the product through direct mailings?
  
• Don't manufacture or sell the product. While a particular product may catch your fancy, it's pointless to make or sell a product if your figures suggest you can't manufacture or sell it at a competitive price or in sufficient quantity to be profitable.

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