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?
How to Find Your Price.
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 and 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
and 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
be 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 one 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.
Why Pricing is Important
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. Priced too high and demand goes down but the same can
be said if the product is priced too low also.
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.
A simple way to look at pricing
strategies is EDLP, market parity and high dollar high value. EDLP was made
famous by Wal-Mart with its every day low price strategy where the price will
be the lowest of any competitors. Market parity is where pricing is in line
competitors and not excessive above or below the market price. The final high
dollar high value is where the price is 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.
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