THE PRICE IS RIGHT? MAYBE OR MAYBE NOT

Pricing is one of the hardest activities an entrepreneur can do because of the ever changing market. What an entrepreneur buys today may not be the price he pays next week. How can a business owner stay on top of the roller coaster?

With pricing affecting almost everything, the entrepreneur has to know key pieces of the pricing puzzle. The first piece is the “ceiling.” This is the highest price possible where the product or service can still be sold. Customers will clearly indicate by their pocketbooks if the price is too high by not buying it. The second piece is the “floor” where the cost of doing business sets the lowest price. This is usually determined by the breakeven point of a business. The range in between the “ceiling” and the “floor” is where the ideal pricing exists. As the business owner, price experimentation may occur to find the ideal one that still covers the costs and provides a profit.

There are three general pricing rules an entrepreneur needs to keep in mind. The first is the price can’t go below costs. The old saying “you will make it up in volume” is never true and if followed, the business is doomed to experience cash flow shortages. The second one is the price can’t go above competitors or the business’s position in the market. This means if the business has an image of a store catering to blue collar workers, then the pricing can’t the highest in the area. If the store is appealing to a more affluent person, then the pricing could be higher than the competition if the audience will pay it. The final rule is the customer decides if the price is right compared to the perceived value and benefit of the product. The better the customer sees your product as a solution to their need, the more they will pay.

Pricing plays an important role in any business. It influences the business’s cost of goods, demand, competition, overall market pricing, customer perceptions and margins. Price goods and services too high and demand goes down, but the same can be said if the product is priced too low. Consumers may perceive the product to be of little value or not provide a solid solution to their needs.

But pricing is not the controller of everything. The entrepreneur has some control over pricing in the areas of sales volume and revenue, market share of the business, the competitive advantage of the business, company image and profitability.

Three simple ways to look at pricing strategies are EDLP ("every day low price"), market parity and high dollar high value. EDLP was made famous by Wal-Mart with its every day low price strategy in which the price will be the lowest of any competitors. Market parity is where pricing is in line competitors and not excessively above or below the market price. Finally, high dollar high value is where the price point is set where the business has an image of quality compared to the competition.

For more information on pricing, contact your local small business development counselor by calling 573-243-3581and asking for Richard Proffer. He can be reached also by email at profferrd@missouri.edu.