As a result, you can charge a higher fee for a superior service and still be considered competitive within your market. If you use competitive pricing to set the fees for a service business, be aware that unlike a situation in which several companies are selling essentially the same products, services vary widely from one firm to another. ![]() Before making a final commitment to your prices, make sure you know the level of price awareness within the market. Should you wish to charge more than your competitors, be able to make a case for a higher price, such as providing a superior customer service or warranty policy. Then figure out your optimum price and decide, based on direct comparison, whether you can defend the prices you've set. To use competitive pricing effectively, know the prices each competitor has established. If there's a major market player, commonly referred to as the market leader, that company will often set the price that other, smaller companies within that same market will be compelled to follow. Competitive pricing is used most often within markets with commodity products, those that are difficult to differentiate from another. If all your competitors are charging $100 for a replacement windshield, for example, that's what you should charge. Demand pricing is difficult to master because you must correctly calculate beforehand what price will generate the optimum relation of profit to volume.Ĭompetitive pricing is generally used when there's an established market price for a particular product or service. This is why retailers charge higher prices to customers. The retailer typically pays more per unit because he or she are unable to purchase, stock, and sell as great a quantity of product as a wholesaler does. The wholesaler profits from a greater volume of sales of a product priced lower than that of the retailer. A wholesaler might buy greater quantities than a retailer, which results in purchasing at a lower unit price. Products usually sold through different sources at different prices-retailers, discount chains, wholesalers, or direct mail marketers-are examples of goods whose price is determined by demand. The following sample calculation should help you grasp the concept of cost-plus pricing: Cost of materialsĭemand pricing is determined by the optimum combination of volume and profit. If your overhead figure is not accurate, you risk profits that are too low. The key to being successful with this method is making sure that the "plus" figure not only covers all overhead but generates the percentage of profit you require as well. Many manufacturers use cost-plus pricing. Prices are generally established in one of four ways: Your customers are making more money because of your product or service.The economy experiences either inflation or recession.You introduce a new product or product line. ![]() When is the right time to review your prices? Do so if: Treat profit as a fixed cost, like a loan payment or payroll, since none of us is in business to break even.īecause pricing decisions require time and market research, the strategy of many business owners is to set prices once and "hope for the best." However, such a policy risks profits that are elusive or not as high as they could be. Most important is to add profit in your calculation of costs. Don't forget to add the costs of markdowns, shortages, damaged merchandise, employee discounts, cost of goods sold, and desired profits to your list of operating expenses. To determine how much it costs to run your business, include property and/or equipment leases, loan repayments, inventory, utilities, financing costs, and salaries/wages/commissions. If the price for your product or service doesn't cover costs, your cash flow will be cumulatively negative, you'll exhaust your financial resources, and your business will ultimately fail.
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