The following comes from a review by Martin Fagan of Squaremilebookstore.com of the book, The Real Warren Buffett, by James O'Loughlin.
Whilst this is not about pricing, there are a couple of bits in it that I think are interesting, the first being the leaky boat quote and the other the price/value principle. It reminds me that whatever price you charge, it should represent value to your customer; that way, he’ll come back.
Merry Christmas!
Crockett
---------------------------------
Warren Buffett is, after Bill Gates, the world’s richest man. In 1950, from delivering papers and running pinball machines in barbers’ shops in Omaha, Nebraska, Buffett had $9,800 in capital, which is the sole basis of his subsequent wealth. He is now worth over $20 billion (and counting), but he still lives in a modest house in Omaha. Had you invested $10,000 in Berkshire-Hathaway (his company-cum-investment fund) when he took over in 1965, you would have about $22,000,000 today.
Buffett’s philosophy and outlined principles on investing hold good – regardless of what type of investor you consider yourself as. First among them is the idea that price is what you pay and value is what you get - and if you're a clever investor, the former will always be less than the latter.
One of his sayings is: “Should you find yourself in a chronically leaking boat, energy devoted to changing vessels is likely to be more productive than energy devoted to patching leaks”.
---------------------------------
You can get Warren Buffett’s book, The Real Warren Buffett, at squaremilebookstore.com, which is where I got this information.
If you want to learn how to increase your prices and increase sales at the same time Click Here!
Sunday, December 24, 2006
Saturday, December 23, 2006
Why £0.99 is Better Than £1.00!
I found reference to this on Dollars and Sense at www.mimiran.blogspot.com
Mark Roth, Sunday, December 17, 2006
Today's Pittsburgh Post-Gazette features patterned sweaters at Kohl's for $19.99, women's jeans at Kmart for $16.99 and a turtleneck at Macy's for $8.99.
The 99-cent pitch isn't limited to apparel, of course. There's a Nikon camera at Circuit City for $129.99, a remote-controlled helicopter at Radio Shack for $69.99 and even humble work gloves at Sears for $14.99.
In classical economic theory, consumers make rational choices based on price comparisons and other objective factors. So any shopper who's looking at a $49.99 cell phone knows he's in effect paying $50, right?
Wrong, say business researchers who have studied this issue.
Not only do people make all kinds of purchasing decisions that aren't rational, they say, but they're particularly susceptible to the kind of offers cited above, which are known in the trade as "9-ending" or "just below" prices.
Studies show the technique not only influences people's perceptions of prices, but boosts their buying.
In one of the most telling experiments, Rutgers University professor Robert Schindler and his colleagues did a real-life test with a women's clothing catalog 10 years ago.
The clothing line normally advertised items ending in 88 cents. For the experiment, the researchers divided the 90,000 customers into three groups.
One group got catalogs with the traditional prices, one got prices ending in .00 and one got prices ending in .99.
The 99-cent catalog significantly outperformed the .00 one, Dr. Schindler said, recording 8 percent higher sales even though the average price decrease was only three-hundredths of a percent.
Standard pricing formulas say that retailers will get a 20-percent increase in sales for a 10-percent drop in prices, yet the 99-cent approach generated almost half as large an increase in sales for a price cut that was minuscule.
Why does this happen? Researchers give two basic reasons: the "left digit effect" and a "right digit signal."
Manoj Thomas, a Cornell University business professor, has done experiments with graduate students showing that the biggest impact of 99-cent pricing comes when it changes the leftmost digit in the price -- $19.99 vs. $20, for instance, as opposed to $3.49 vs. $3.50.
"Generally, it can be said that this happens because we read from left to right," Dr. Thomas said, and we place extra importance on the first number we see.
When he asked students to compare the prices of $99.99 with $150 and then compare $100 with $150, they rated the gap between $99.99 and $150 as being significantly larger, even though there was only a penny's difference.
The "right digit signal" is slightly different, because it tells consumers that the item in question is a bargain.
A 99-cent ending "makes the price 'feel' less," Dr. Schindler said, "and it goes deeper than just appearances. If you give people two ads for a blouse, one priced at $22 and one at $21.99, people are more likely to judge the $21.99 item as being on sale.
"And there's an emotional kick to getting a discount that makes a difference to consumers."
Retailers also look at 99-cent pricing from the opposite direction, said Britt Beemer, chairman of America's Research Group, which interviews up to 15,000 people a week to gauge consumer behavior and marketing techniques.
"Let's say your item is $49.99 vs. $49," Mr. Beemer said.
"There is no perceived difference for most consumers between the two. The consumer looks at the dollar number and forgets the right hand digits -- I would guess that only one of four consumers looks at those right hand digits."
From the seller's standpoint, then, the $49.99 price can yield them almost one extra dollar for each item, with no perceived difference in the price on the part of the buyer.
No one knows exactly who invented 99-cent pricing or when it began.
One story, Dr. Thomas said, is that store owners in the 1930s who didn't trust their clerks created this pricing so the clerk would have to open the till to give change to the customer, rather than being able to quietly pocket the bills without the owner finding out.
A British consumer researcher, Rachel Bowlby of University College London, said she had heard an almost identical story in the United Kingdom, except that the organization credited with the invention was the charitable group Oxfam.
Once it was established, 99-cent pricing became a deeply ingrained part of consumer culture in the United States and much of Europe, so that retailers that wanted to appear distinctive had to find ways to vary the 99-cent ending.
Boscov's, the chain that recently established a presence in Pittsburgh, does it by advertising 97-cent endings. And Wal-Mart founder Sam Walton pushed for unusual cents-endings to his stores' prices to distinguish them from those at other retailers.
Mr. Walton's policy of promoting such prices as $8.44 or $3.17, Dr. Schindler wrote, "may communicate to consumers that no fine tuning was done at all -- the prices were cut 'right to the bone.' "
The 99-cent approach is not global, however.
In his native country of India and in much of Asia, Dr. Thomas said, consumers are less likely to see such numbers because the governments still set many retail prices.
One Drexel University study showed that Polish people who had grown up under the Soviet regime preferred round-number prices to 99-cent ones.
"The Polish respondents perceived retailers using [99-cent prices] as offering them an unfair price and also trying to deceive them," the study concluded.
And in China, the researchers said, 99-cent prices would be acceptable, but woe to the retailer whose prices end in the unlucky number 4, which phonetically sounds like the word for death.
If our culture has taught us that 99-cent prices equal a bargain, then certain retailers have reason to avoid them like the plague.
One Ohio State University study, for instance, found that menu prices at upscale restaurants typically end in round numbers because that speaks of "quality" more than "discount."
The same thing shows up at upscale retailers such as Neiman Marcus, where a current designer trunk sale is offering linen pants, tank dresses and cashmere sweaters that all end in fat round numbers.
"I think this is all consistent with the idea that odd prices act as an information-processing reduction, indicating a product is a deal," said researcher Russell Winer of New York University.
But if you really want a bargain, Dr. Winer added, it's good to remember that "just because the price ends with 99 cents, it doesn't mean it's a really good deal."
(Mark Roth can be reached at mroth@post-gazette.com or at 412-263-1130.)
To find out how to make your prices irresistible Click Here!
Mark Roth, Sunday, December 17, 2006
Today's Pittsburgh Post-Gazette features patterned sweaters at Kohl's for $19.99, women's jeans at Kmart for $16.99 and a turtleneck at Macy's for $8.99.
The 99-cent pitch isn't limited to apparel, of course. There's a Nikon camera at Circuit City for $129.99, a remote-controlled helicopter at Radio Shack for $69.99 and even humble work gloves at Sears for $14.99.
In classical economic theory, consumers make rational choices based on price comparisons and other objective factors. So any shopper who's looking at a $49.99 cell phone knows he's in effect paying $50, right?
Wrong, say business researchers who have studied this issue.
Not only do people make all kinds of purchasing decisions that aren't rational, they say, but they're particularly susceptible to the kind of offers cited above, which are known in the trade as "9-ending" or "just below" prices.
Studies show the technique not only influences people's perceptions of prices, but boosts their buying.
In one of the most telling experiments, Rutgers University professor Robert Schindler and his colleagues did a real-life test with a women's clothing catalog 10 years ago.
The clothing line normally advertised items ending in 88 cents. For the experiment, the researchers divided the 90,000 customers into three groups.
One group got catalogs with the traditional prices, one got prices ending in .00 and one got prices ending in .99.
The 99-cent catalog significantly outperformed the .00 one, Dr. Schindler said, recording 8 percent higher sales even though the average price decrease was only three-hundredths of a percent.
Standard pricing formulas say that retailers will get a 20-percent increase in sales for a 10-percent drop in prices, yet the 99-cent approach generated almost half as large an increase in sales for a price cut that was minuscule.
Why does this happen? Researchers give two basic reasons: the "left digit effect" and a "right digit signal."
Manoj Thomas, a Cornell University business professor, has done experiments with graduate students showing that the biggest impact of 99-cent pricing comes when it changes the leftmost digit in the price -- $19.99 vs. $20, for instance, as opposed to $3.49 vs. $3.50.
"Generally, it can be said that this happens because we read from left to right," Dr. Thomas said, and we place extra importance on the first number we see.
When he asked students to compare the prices of $99.99 with $150 and then compare $100 with $150, they rated the gap between $99.99 and $150 as being significantly larger, even though there was only a penny's difference.
The "right digit signal" is slightly different, because it tells consumers that the item in question is a bargain.
A 99-cent ending "makes the price 'feel' less," Dr. Schindler said, "and it goes deeper than just appearances. If you give people two ads for a blouse, one priced at $22 and one at $21.99, people are more likely to judge the $21.99 item as being on sale.
"And there's an emotional kick to getting a discount that makes a difference to consumers."
Retailers also look at 99-cent pricing from the opposite direction, said Britt Beemer, chairman of America's Research Group, which interviews up to 15,000 people a week to gauge consumer behavior and marketing techniques.
"Let's say your item is $49.99 vs. $49," Mr. Beemer said.
"There is no perceived difference for most consumers between the two. The consumer looks at the dollar number and forgets the right hand digits -- I would guess that only one of four consumers looks at those right hand digits."
From the seller's standpoint, then, the $49.99 price can yield them almost one extra dollar for each item, with no perceived difference in the price on the part of the buyer.
No one knows exactly who invented 99-cent pricing or when it began.
One story, Dr. Thomas said, is that store owners in the 1930s who didn't trust their clerks created this pricing so the clerk would have to open the till to give change to the customer, rather than being able to quietly pocket the bills without the owner finding out.
A British consumer researcher, Rachel Bowlby of University College London, said she had heard an almost identical story in the United Kingdom, except that the organization credited with the invention was the charitable group Oxfam.
Once it was established, 99-cent pricing became a deeply ingrained part of consumer culture in the United States and much of Europe, so that retailers that wanted to appear distinctive had to find ways to vary the 99-cent ending.
Boscov's, the chain that recently established a presence in Pittsburgh, does it by advertising 97-cent endings. And Wal-Mart founder Sam Walton pushed for unusual cents-endings to his stores' prices to distinguish them from those at other retailers.
Mr. Walton's policy of promoting such prices as $8.44 or $3.17, Dr. Schindler wrote, "may communicate to consumers that no fine tuning was done at all -- the prices were cut 'right to the bone.' "
The 99-cent approach is not global, however.
In his native country of India and in much of Asia, Dr. Thomas said, consumers are less likely to see such numbers because the governments still set many retail prices.
One Drexel University study showed that Polish people who had grown up under the Soviet regime preferred round-number prices to 99-cent ones.
"The Polish respondents perceived retailers using [99-cent prices] as offering them an unfair price and also trying to deceive them," the study concluded.
And in China, the researchers said, 99-cent prices would be acceptable, but woe to the retailer whose prices end in the unlucky number 4, which phonetically sounds like the word for death.
If our culture has taught us that 99-cent prices equal a bargain, then certain retailers have reason to avoid them like the plague.
One Ohio State University study, for instance, found that menu prices at upscale restaurants typically end in round numbers because that speaks of "quality" more than "discount."
The same thing shows up at upscale retailers such as Neiman Marcus, where a current designer trunk sale is offering linen pants, tank dresses and cashmere sweaters that all end in fat round numbers.
"I think this is all consistent with the idea that odd prices act as an information-processing reduction, indicating a product is a deal," said researcher Russell Winer of New York University.
But if you really want a bargain, Dr. Winer added, it's good to remember that "just because the price ends with 99 cents, it doesn't mean it's a really good deal."
(Mark Roth can be reached at mroth@post-gazette.com or at 412-263-1130.)
To find out how to make your prices irresistible Click Here!
Tuesday, December 19, 2006
Pricing is the Moment of Truth!
"Pricing is the moment of truth - all of marketing comes to focus in the pricing decision."
(Professor E. Raymond Corey of Harvard Business School, 1962).
Many of the companies I have worked for have had no pricing strategy or accountability, pricing being something that just happened. When costs go up, just put the price up; when competition comes along, or wakes up, then just match the price. This is remarkable if you think about it, because I’m talking about some big players.
Again, most businesses I have worked for had no one specifically responsible for pricing; yes someone was responsible for up-loading onto the system, but this was not a strategic operation, or even a tactical one come to that, just an operational one.
‘Finance’ says that costs have gone up say 3%, or 5% and this is added on and Excel does the rounding.
Ha! Actually not; how many times have I seen a case price that is not divisible by the number of units it contains? – I love those!
This lack of attention to pricing costs businesses dearly and may have cost some their existence. Pricing strategy should be approved and championed by the senior management and somebody, somewhere (not the purchasing department!) should have responsibility for its crafting and implementation.
If you don’t have a pricing strategy, your profits will bleed away!
Crockett, Tuesday, 19 December 2006
(Professor E. Raymond Corey of Harvard Business School, 1962).
Many of the companies I have worked for have had no pricing strategy or accountability, pricing being something that just happened. When costs go up, just put the price up; when competition comes along, or wakes up, then just match the price. This is remarkable if you think about it, because I’m talking about some big players.
Again, most businesses I have worked for had no one specifically responsible for pricing; yes someone was responsible for up-loading onto the system, but this was not a strategic operation, or even a tactical one come to that, just an operational one.
‘Finance’ says that costs have gone up say 3%, or 5% and this is added on and Excel does the rounding.
Ha! Actually not; how many times have I seen a case price that is not divisible by the number of units it contains? – I love those!
This lack of attention to pricing costs businesses dearly and may have cost some their existence. Pricing strategy should be approved and championed by the senior management and somebody, somewhere (not the purchasing department!) should have responsibility for its crafting and implementation.
If you don’t have a pricing strategy, your profits will bleed away!
Crockett, Tuesday, 19 December 2006
Determining a Price
Ohio State University Fact Sheet
Community Development
700 Ackerman Road, Suite 235, Columbus, OH 43202-1578
Pricing
CDFS-1326-95
Small Business Series
Gregory R. Passewitz
In business it is possible to have the very best product or service and have excellent sales volume, but if the wrong price has been set on the product or the service the business will eventually fail. In any business, the ultimate reason for a pricing system is to make a profit from your work. The amount of profit depends on your costs, both variable and fixed, selling price, and the number of items sold or services rendered. Some components to consider when setting a price include:
* What are customers willing to pay?
* What is the break-even point; are all costs covered?
* How much profit do you want to make?
* What is your competition charging?
Determining a Product Price
In determining a price for your product, it is important to use your costs of production as base. Therefore, you must know your cost of production so that a break-even point can be established.
The first step in pricing is to determine your product cost. All costs can be divided into variable and fixed (overhead) costs. Variable costs, sometimes called out-of-pocket costs, are the costs of doing business. These are production-related and include materials, labor, advertising and packaging. The fixed costs are the costs of being in business. They include all items that you pay for regardless of whether or not you are producing or selling a product. Examples are tools, equipment, depreciation, utilities and taxes. Remember, the reason for establishing your product cost is to form the base for your pricing formula.
No single pricing formula will work for all businesses, nor is there a formula that will assure maximum profits in all situations. Every business must approach the problem individually. What follows are several formulas to help you determine a price. Each formula adds an additional item to consider in determining a selling price. By making conscious decisions based on facts, you can determine your price. If, after using the formulas, you find that your selling price is noticeably higher than that of your competitors, you may need to look for ways to lessen your production costs, reduce overhead costs or accept less profit, and become more efficient without affecting the quality of your product.
In helping to compare the pricing formulas, assume a firm has determined that a market exists for guinea pig cages. The cost of materials per cage is $4. It takes one hour of labor to construct the cage and the labor rate is $5 per hour. Overhead costs are $2 per cage.
Formula A
Materials + labor (production time x hourly wage) divided by number of units = selling price per unit.
Example: $4.00 + $2.00 + $5.00 divided by 1 cage = $9.00 selling price
This approach is often used by beginners because it provides a reasonable wage. You must determine material cost and give yourself a labor rate. There should be a value placed on your time. There is no allowance for overhead costs, inflation or profit.
Formula B
Materials + overhead + labor (production time x hourly wage) divided by number of units = selling price per unit.
Example: $4.00 + $2.00 + $5.00 + $2.50 divided by 1 cage = $11.00 per cage
Overhead costs have been added in this formula.
Formula C
Materials + overhead + labor + profit divided by 1 cage = selling price per unit
Example: $4.00 + $2.00 + $5.00 + $2.50 divided by 1 cage = $13.50
This is the most individualized approach because a conscious decision is made about the profit you want from your business. You decide on a satisfactory wage and the amount of time you spend earning it. Profit and your labor rate are not the same.
Formula D
Wholesale price (Formula C) X 2 = retail selling price per unit.
Example: $13.50 x 2 = $27.00
This is a general distributor or retail pricing formula.
It assumes efficiency in production and a steady demand. When you decide to wholesale you must understand that the buyer will mark up your item a certain percentage. If you sell directly anywhere in the vicinity of the retailer, you must not under-cut the shop that is handling your work.
Determining a Service Price
A service-oriented business needs to figure the operating or fixed costs and the variable costs simply to keep the business going. These costs are the same as for the product-oriented business. In a service-oriented business the price should include:
* Variable costs
* Fixed (operating expenses) costs
* Profit
Labor is usually the major portion of the service-oriented business expense. You must figure out what your time per hour is worth for each service job you do and include it in your price.
You may decide to change the hourly minimum wage for yourself. If the service you provide is complicated and/or requires special expertise not readily available, you may want to charge a higher amount for your labor. Keep in mind this will create a higher price and some customers will either be unwilling or unable to buy your service. Some entrepreneurs are willing to charge less than minimum wage for their labor until they have established their business reputation.
Profit should also be included in the price. A business cannot continue to operate if it does not make a profit. You will want to find out the profit percentage made by other similar service- oriented businesses and include a comparable amount in your price. Use the following formula to determine a price to charge for your services.
* First, you must decide on the amount to charge per hour for your labor.
* Second, determine the amount of overhead and variable expenses you incur to deliver your service.
* Third, decide what you think is a fair and competitive amount of profit.
Formula A-Price Per Hour of Service
Labor expenses per hour + overhead and variable expenses + profit = price per hour charged.
Formula B-Price Per Job
In lieu of charging an hourly rate for your service, you may wish to have a per job charge. To figure out this price, determine the total hours to do the job, then add this figure to this formula.
Labor expenses per hour x hours needed to do job + overhead and variable expenses + profit = price charged per job.
Remember, the key to setting prices for your product or service is to set them high enough to cover all your costs and low enough to encourage people to buy. Learning to set prices takes some business experience. The information in this fact sheet is presented as a helpful guide; some degree of flexibility is needed.
Consumer Psychology Toward Price
Whether they know it or not, most consumers develop mental attitudes about the price they are willing to pay for a product or service. There is considerable evidence that the importance of price in the decision to purchase varies from product to product and person to person.
There are numerous price strategies used by businesses to take advantage of customer pricing psychology. Three of the more common are listed below.
Multiple Unit Pricing
Simply put, this is a strategy where the customer perceives quantity buying as involving greater savings. An example is an item that normally sells for 49 cents. Multiple pricing would change this situation to a two for 89 cents or perhaps three for $1.39 price. In general, multiple unit pricing is usually effective in increasing immediate sales. However, this pricing technique may not increase the rate of consumption of the product. People will buy extra units of the product and use them as needed.
Several factors ought to be considered when using multiple unit pricing. First, the multiple-unit price has to be easy to understand. Eight for 79 cents is usually less effective than simple multiples of two for 19 cents. Second, the bargain concept of multiple pricing is not usually effective over the $10 range. It is, however, very effective for items within the $1 range.
Odd Number Pricing
Odd number pricing refers to setting a price just below the psychological breaks in the dollar, such as a price is set at 49 cents or 99 cents rather than 50 cents or $1. Prices may be set at 19 cents or 49 cents or $19.95. This gives the psychological impression to the customer that the price is not 20 cents or 50 cents or $20, but less. Odd number pricing is often avoided in prestige stores or with higher priced items. An expensive dress could be priced at $150, not $149.95.
Prestige Pricing
Prestige pricing refers to high markups and/or pricing above the market. Many consumers are willing to pay more for a product or service because it is felt the product or service is of higher quality or possesses brand or manufacturer prestige. Usually above-market pricing can be done only when the product is unique or distinctive, or when the seller or manufacturer has acquired prestige in the field.
All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status.
Keith L. Smith, Associate Vice President for Ag. Adm. and Director, OSU Extension.
TDD No. 800-589-8292 (Ohio only) or 614-292-1868
Community Development
700 Ackerman Road, Suite 235, Columbus, OH 43202-1578
Pricing
CDFS-1326-95
Small Business Series
Gregory R. Passewitz
In business it is possible to have the very best product or service and have excellent sales volume, but if the wrong price has been set on the product or the service the business will eventually fail. In any business, the ultimate reason for a pricing system is to make a profit from your work. The amount of profit depends on your costs, both variable and fixed, selling price, and the number of items sold or services rendered. Some components to consider when setting a price include:
* What are customers willing to pay?
* What is the break-even point; are all costs covered?
* How much profit do you want to make?
* What is your competition charging?
Determining a Product Price
In determining a price for your product, it is important to use your costs of production as base. Therefore, you must know your cost of production so that a break-even point can be established.
The first step in pricing is to determine your product cost. All costs can be divided into variable and fixed (overhead) costs. Variable costs, sometimes called out-of-pocket costs, are the costs of doing business. These are production-related and include materials, labor, advertising and packaging. The fixed costs are the costs of being in business. They include all items that you pay for regardless of whether or not you are producing or selling a product. Examples are tools, equipment, depreciation, utilities and taxes. Remember, the reason for establishing your product cost is to form the base for your pricing formula.
No single pricing formula will work for all businesses, nor is there a formula that will assure maximum profits in all situations. Every business must approach the problem individually. What follows are several formulas to help you determine a price. Each formula adds an additional item to consider in determining a selling price. By making conscious decisions based on facts, you can determine your price. If, after using the formulas, you find that your selling price is noticeably higher than that of your competitors, you may need to look for ways to lessen your production costs, reduce overhead costs or accept less profit, and become more efficient without affecting the quality of your product.
In helping to compare the pricing formulas, assume a firm has determined that a market exists for guinea pig cages. The cost of materials per cage is $4. It takes one hour of labor to construct the cage and the labor rate is $5 per hour. Overhead costs are $2 per cage.
Formula A
Materials + labor (production time x hourly wage) divided by number of units = selling price per unit.
Example: $4.00 + $2.00 + $5.00 divided by 1 cage = $9.00 selling price
This approach is often used by beginners because it provides a reasonable wage. You must determine material cost and give yourself a labor rate. There should be a value placed on your time. There is no allowance for overhead costs, inflation or profit.
Formula B
Materials + overhead + labor (production time x hourly wage) divided by number of units = selling price per unit.
Example: $4.00 + $2.00 + $5.00 + $2.50 divided by 1 cage = $11.00 per cage
Overhead costs have been added in this formula.
Formula C
Materials + overhead + labor + profit divided by 1 cage = selling price per unit
Example: $4.00 + $2.00 + $5.00 + $2.50 divided by 1 cage = $13.50
This is the most individualized approach because a conscious decision is made about the profit you want from your business. You decide on a satisfactory wage and the amount of time you spend earning it. Profit and your labor rate are not the same.
Formula D
Wholesale price (Formula C) X 2 = retail selling price per unit.
Example: $13.50 x 2 = $27.00
This is a general distributor or retail pricing formula.
It assumes efficiency in production and a steady demand. When you decide to wholesale you must understand that the buyer will mark up your item a certain percentage. If you sell directly anywhere in the vicinity of the retailer, you must not under-cut the shop that is handling your work.
Determining a Service Price
A service-oriented business needs to figure the operating or fixed costs and the variable costs simply to keep the business going. These costs are the same as for the product-oriented business. In a service-oriented business the price should include:
* Variable costs
* Fixed (operating expenses) costs
* Profit
Labor is usually the major portion of the service-oriented business expense. You must figure out what your time per hour is worth for each service job you do and include it in your price.
You may decide to change the hourly minimum wage for yourself. If the service you provide is complicated and/or requires special expertise not readily available, you may want to charge a higher amount for your labor. Keep in mind this will create a higher price and some customers will either be unwilling or unable to buy your service. Some entrepreneurs are willing to charge less than minimum wage for their labor until they have established their business reputation.
Profit should also be included in the price. A business cannot continue to operate if it does not make a profit. You will want to find out the profit percentage made by other similar service- oriented businesses and include a comparable amount in your price. Use the following formula to determine a price to charge for your services.
* First, you must decide on the amount to charge per hour for your labor.
* Second, determine the amount of overhead and variable expenses you incur to deliver your service.
* Third, decide what you think is a fair and competitive amount of profit.
Formula A-Price Per Hour of Service
Labor expenses per hour + overhead and variable expenses + profit = price per hour charged.
Formula B-Price Per Job
In lieu of charging an hourly rate for your service, you may wish to have a per job charge. To figure out this price, determine the total hours to do the job, then add this figure to this formula.
Labor expenses per hour x hours needed to do job + overhead and variable expenses + profit = price charged per job.
Remember, the key to setting prices for your product or service is to set them high enough to cover all your costs and low enough to encourage people to buy. Learning to set prices takes some business experience. The information in this fact sheet is presented as a helpful guide; some degree of flexibility is needed.
Consumer Psychology Toward Price
Whether they know it or not, most consumers develop mental attitudes about the price they are willing to pay for a product or service. There is considerable evidence that the importance of price in the decision to purchase varies from product to product and person to person.
There are numerous price strategies used by businesses to take advantage of customer pricing psychology. Three of the more common are listed below.
Multiple Unit Pricing
Simply put, this is a strategy where the customer perceives quantity buying as involving greater savings. An example is an item that normally sells for 49 cents. Multiple pricing would change this situation to a two for 89 cents or perhaps three for $1.39 price. In general, multiple unit pricing is usually effective in increasing immediate sales. However, this pricing technique may not increase the rate of consumption of the product. People will buy extra units of the product and use them as needed.
Several factors ought to be considered when using multiple unit pricing. First, the multiple-unit price has to be easy to understand. Eight for 79 cents is usually less effective than simple multiples of two for 19 cents. Second, the bargain concept of multiple pricing is not usually effective over the $10 range. It is, however, very effective for items within the $1 range.
Odd Number Pricing
Odd number pricing refers to setting a price just below the psychological breaks in the dollar, such as a price is set at 49 cents or 99 cents rather than 50 cents or $1. Prices may be set at 19 cents or 49 cents or $19.95. This gives the psychological impression to the customer that the price is not 20 cents or 50 cents or $20, but less. Odd number pricing is often avoided in prestige stores or with higher priced items. An expensive dress could be priced at $150, not $149.95.
Prestige Pricing
Prestige pricing refers to high markups and/or pricing above the market. Many consumers are willing to pay more for a product or service because it is felt the product or service is of higher quality or possesses brand or manufacturer prestige. Usually above-market pricing can be done only when the product is unique or distinctive, or when the seller or manufacturer has acquired prestige in the field.
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Thursday, December 14, 2006
Christmas Shopping
Not a lot to say today; I've been Christmas shopping rather than working! However, I started out first light and missed most of the rush, so it's mostly done now. Having started shopping early (for me) this year, I was able to select from a wide range of cards instead of picking through the remains, but I was astonished at the price of them.
I bought just four fairly standard sized cards for just over £10 and the production cost of the lot couldn't have come to £0.50. Obviously pricing for profit during the busy season!
I bought just four fairly standard sized cards for just over £10 and the production cost of the lot couldn't have come to £0.50. Obviously pricing for profit during the busy season!
Wednesday, December 13, 2006
I Don't Know Much About Wine ........
I don't know much about wine, although I should, I've drunk enough of the stuff! But, the pricing is very confusing. Take French wine; now I know beyond a shadow of a doubt that the French make the finest wines, but I also know that very little of their best stuff finds its way to the UK. I spent five years working for a Paris based company, quite a lot of it in France and I have yet to have a poor bottle of wine when in the company of a French person, regardless of price.
But I digress. There is a great variety of wine available now; Australian, US, South American, Italian, Spanish, Bulgarian - you name it, you can get it. However, it's the Australian that have taken the premium ground in the mid-range and they seem to have their pricing for profit strategy right.
You can get a decent red for £4.99 up and quite a lot now is at £7.99 to £12.99. If you prefer white, the ubiquitous Chardonnay is still very popular here, although the heavily oaked stuff seems to have been challenged by the crisper European varieties such as Pinot Grigio, which is priced at the value end generally.
The real challenge for the wine producers is the move to screw-top, which I'm told is superior to (cheaper than?) traditional cork. The Aussies are taking the lead here, having moved their low end to screw-top already and I'm told, the mid premium is going to move across imminently. The question is, will they be able to hold the premium price?
But I digress. There is a great variety of wine available now; Australian, US, South American, Italian, Spanish, Bulgarian - you name it, you can get it. However, it's the Australian that have taken the premium ground in the mid-range and they seem to have their pricing for profit strategy right.
You can get a decent red for £4.99 up and quite a lot now is at £7.99 to £12.99. If you prefer white, the ubiquitous Chardonnay is still very popular here, although the heavily oaked stuff seems to have been challenged by the crisper European varieties such as Pinot Grigio, which is priced at the value end generally.
The real challenge for the wine producers is the move to screw-top, which I'm told is superior to (cheaper than?) traditional cork. The Aussies are taking the lead here, having moved their low end to screw-top already and I'm told, the mid premium is going to move across imminently. The question is, will they be able to hold the premium price?
To improve your profitability
To improve your profitability you must either make a larger gross margin on each dollar of sales or sell more without increasing your fixed costs. It goes without saying that the greatest improvement will be realised when you achieve both simultaneously.
Remember your gross margin is the difference between the price of your product and what it costs you to buy or make it. Therefore, the only way to increase your gross margin is to sell at a higher price or buy at a lower price.
In most instances (but not all!) you will have limited scope to buy at a lower price. For this reason your selling price is the critical variable.
Without doubt, the biggest single barrier preventing small business managers from making an acceptable profit is their refusal to charge a price that will enable them to achieve this. You are not in business to match the price your competitors set, but you are there to service your customers.
In fact, studies of the factors people regard as important influences on their decision to deal with a particular business indicate that product and price are relevant in only 15% of cases.
It is the lazy manager's competitive strategy to try to hold or win market share on the basis of price discounting. It is relevant and applicable only in the one situation where you have both a definite cost advantage (either variable or fixed) over your competitors and your product or service is one where customers are very price sensitive.
For example, if your gross margin is 30% and you reduce price by 10% you need sales volumes to increase by 50% to maintain your profit. Rarely has such a strategy worked in the past and it's unlikely that it will work in the future.
The service you offer or the unique way that you add value to the clients you support are all sustainable ways to differentiate your business and support an ongoing pricing for profit strategy.
By: Chrisp
Article Directory: http://www.articledashboard.com
Remember your gross margin is the difference between the price of your product and what it costs you to buy or make it. Therefore, the only way to increase your gross margin is to sell at a higher price or buy at a lower price.
In most instances (but not all!) you will have limited scope to buy at a lower price. For this reason your selling price is the critical variable.
Without doubt, the biggest single barrier preventing small business managers from making an acceptable profit is their refusal to charge a price that will enable them to achieve this. You are not in business to match the price your competitors set, but you are there to service your customers.
In fact, studies of the factors people regard as important influences on their decision to deal with a particular business indicate that product and price are relevant in only 15% of cases.
It is the lazy manager's competitive strategy to try to hold or win market share on the basis of price discounting. It is relevant and applicable only in the one situation where you have both a definite cost advantage (either variable or fixed) over your competitors and your product or service is one where customers are very price sensitive.
For example, if your gross margin is 30% and you reduce price by 10% you need sales volumes to increase by 50% to maintain your profit. Rarely has such a strategy worked in the past and it's unlikely that it will work in the future.
The service you offer or the unique way that you add value to the clients you support are all sustainable ways to differentiate your business and support an ongoing pricing for profit strategy.
By: Chrisp
Article Directory: http://www.articledashboard.com
Monday, December 11, 2006
Pricing Yourself to Get and Stay In Business
I've just come across this and although this was written a few years ago, I thought you may be interested. Crockett.
© 2002 Elena Fawkner
It goes without saying that the bottom line of any successful business is profit.
Don’t make a profit and you won’t be in business for very long.
Making a profit is pretty simple really.
You just have to make more than you spend. The trick is to know how much you have to make to exceed what you spend.
And you spend more than money when running a business. You spend something infinitely more valuable. Time. And, as we all know, time is money.
To maximize profits, accurate pricing is absolutely critical. Your prices must be high enough to cover costs and enable you to earn a reasonable return but low enough to remain attractive to prospective clients.
New entrepreneurs often have difficulty accurately pricing the value of their time and expertise. Some take the approach that they can work cheaply because they're fast and they’re prepared to take any work, now matter how low-paying, to fill in the time between more lucrative assignments.
For this group, the mindset appears to be that any work is better than no work. Although this may seem reasonable when you're first starting out and you just want to make your mark as early as possible, the downside is that this short- sighted approach can create in customers a “cheap” mindset that is difficult to shift once the business becomes established.
Another group of entrepreneurs, though, takes the approach from the outset that they are worth top dollar and demand fair pricing for the value they provide and won’t accept anything less. This group appears to be more successful than the former in the longer run. Sure, they may find it slow to start with. After all, they are new in town, they can't rely on repeat business and they can't ride the wave of their own impressive reputations. But by setting the bar high to start with, when their businesses DO become established, they've set the tone and their businesses usually have a firmer foundation for it.
This article looks at the fundamentals of pricing for the new home-based business entrepreneur.
BASIC PRINCIPLES OF PRICING
Here are some basic principles to keep in mind when considering your pricing strategies:
=> Prices must at least cover costs.
If you don't at least cover costs, and this includes an amount for your time, you will incur a loss. If your business is incurring a loss it's a hobby.
=> The best way to lower price is to lower costs
As price equals costs plus profit margin, it's obviously better to reduce the cost element than the profit element if, for any reason, you find that you must reduce your prices.
=> Prices must reflect the environment in which they operate
Any price, whether yours or your competitors', necessarily reflects the dynamics of cost, demand, market changes, competition, product utility, product longevity, maintenance and end use.
=> Prices must be within the range of what customers are prepared to pay
It's all very well having the best bread slicer in the western world but if your price is more than customers are prepared to pay for it, so what? On the other hand, there is absolutely no reason to charge less than customers are prepared to pay either.
=> Prices should be set at levels that will shift products and services and not to beat competitors alone
It's easy when you start delving into all of the sophisticated analysis and research around about optimum pricing levels to forget that, at the end of the day, you set your prices as high as you can while still shifting your products and services. So don't think that keeping pace with competitors is enough. It isn't. You may have competitive advantages that mean you can charge more than your competitor.
=> The price you set should represent a fair return for your time, talent, risk and investment
Don't be coy about demanding a reward for what you bring to the table. Your expertise and talent has objective worth. Don't just give it away. Charge for it.
PRICE = COST + PROFIT MARGIN
The basic price you will strike is simply your costs plus a profit margin. It follows that before you can set your prices you must know exactly what your costs are. Costs fall into three main areas:
=> Direct Costs
Direct costs are those things directly related to the creation of your product such as raw materials, parts and supplies.
=> Overheads
Overheads are business costs not directly related to production and include things such as taxes, rent, office supplies and equipment, business related travel, insurance, permits, repair of equipment, utilities (electricity and telephone) and professional advice (accountant, lawyer).
=> Labor
Labor costs include all wages paid to employees *including yourself*. It's amazing how many home-business owners forget to include their time as a cost of business!
Calculate your labor costs by multiplying the number of hours worked by an hourly wage. You should also include fringe benefits (typically 15% plus).
Once you have ascertained your total costs, add a profit margin. A 15-20% profit margin is standard for most home-based businesses. Although you have included your own wages in your labor costs, if you don’t add a profit margin there will be no money for growth or expansion of the business.
RELATIONSHIP BETWEEN PRICES AND PROFITS
The easiest way to increase your profit is to raise your prices. But you can’t just raise prices indiscriminately. Look for ways to manipulate niche pricing instead. This means looking for specific areas of your business where you have some latitude to increase prices.
The way to do this is to identify the areas where the perceived value of what you are offering is higher than the price you are currently charging. Start by carrying out a competitive analysis of your business. Find out how your product compares with your competitors’ on the basis not only of price but costs as well.
If you are going to source this information by approaching competitors directly, a word of caution ... DON’T. The Sherman Act in the US (and similar legislation in many other jurisdictions) prohibits businesses of any size from entering “contracts, combinations or conspiracies” in restraint of trade. In other words, it’s illegal to make deals with competitors about what price you’ll charge or what services you’ll offer. Merely discussing prices with competitors can be construed as an attempt to conspire on prices. This is one area where you just don't want to give even the *whiff* of an impression of doing anything of the sort.
So, be circumspect in your research. Never discuss prices with competitors and avoid frequent communications with them at all if possible. Instead, to keep tabs on what your competition is up to, read their ads, talk to their suppliers, engage mystery shoppers or send an employee to make observations.
Once you have completed your competitive intelligence, analyze your competitive advantages and disadvantages. If, as a result of your analysis, you learn than you have an advantage over your competition because your business is website design and you know how to do cgi-scripting but your competition has to outsource this function and this means a delay of one to two weeks, then this advantage is something your customers will likely pay more for. Adjust your prices accordingly.
WHEN YOU'RE THE PRODUCT
Some businesses don’t offer tangible products at all. Sometimes, YOU are the product. So, how do you price yourself if you’re, say, an ecommerce consultant and your business is assisting brick and mortar businesses make the transition to ecommerce?
One perfectly reasonable approach is to start with a calculation of your actual expenses and your salary needs and then divide the total by a reasonable estimate of billable hours. An article entitled "Setting Fees" by David Dukoff gives a good overview of how to go about doing this.
Let’s say your expenses and salary needs mean that your business needs to be generating $100,000 a year. Let’s also say you prefer to charge clients by the hour rather than by quoting on projects. How much do you need to charge per billable hour to generate $100,000 per year?
Dukoff uses the following approach. To start with, how many billable hours do you have? Let’s start with 2,080 work hours in a year. Deduct 100 hours for vacation time (2 weeks), a further 80 hours for popular holidays, 40 hours personal time and sick leave and 20-40% of time for marketing and administration. This leaves you with around 1,000 billable hours in a year. You therefore need to charge $100 per billable hour to achieve your goal of $100,000 income.
OTHER PRICING STRATEGIES
Other pricing strategies to include in your structure include discounts to encourage prompt payment or quantity purchases, seasonality issues (for example, end of season “sales”), offering senior citizen and student discounts and other promotional incentives.
As you can see, setting the "right" price for your products and services is absolutely crucial to the profitability (read survival) of your business in the longer term. But with careful analysis and a methodical approach, you should be able to arrive at reasonable pricepoints without too much difficulty. Then it's just a matter of monitoring demand in response to price changes to settle on the optimum pricing for your business.
But don't rest there. Your prices operate within a constantly changing environment and you need to be ever-vigilant to ensure that your prices remain at their competitive maxima.
One final piece of advice: if in doubt, price high rather than low. It is much easier to discount prices than it is to increase them.
------
Elena Fawkner is editor of A Home-Based Business Online ... practical business ideas, opportunities and solutions for the work-from-home entrepreneur. http://www.ahbbo.com
© 2002 Elena Fawkner
It goes without saying that the bottom line of any successful business is profit.
Don’t make a profit and you won’t be in business for very long.
Making a profit is pretty simple really.
You just have to make more than you spend. The trick is to know how much you have to make to exceed what you spend.
And you spend more than money when running a business. You spend something infinitely more valuable. Time. And, as we all know, time is money.
To maximize profits, accurate pricing is absolutely critical. Your prices must be high enough to cover costs and enable you to earn a reasonable return but low enough to remain attractive to prospective clients.
New entrepreneurs often have difficulty accurately pricing the value of their time and expertise. Some take the approach that they can work cheaply because they're fast and they’re prepared to take any work, now matter how low-paying, to fill in the time between more lucrative assignments.
For this group, the mindset appears to be that any work is better than no work. Although this may seem reasonable when you're first starting out and you just want to make your mark as early as possible, the downside is that this short- sighted approach can create in customers a “cheap” mindset that is difficult to shift once the business becomes established.
Another group of entrepreneurs, though, takes the approach from the outset that they are worth top dollar and demand fair pricing for the value they provide and won’t accept anything less. This group appears to be more successful than the former in the longer run. Sure, they may find it slow to start with. After all, they are new in town, they can't rely on repeat business and they can't ride the wave of their own impressive reputations. But by setting the bar high to start with, when their businesses DO become established, they've set the tone and their businesses usually have a firmer foundation for it.
This article looks at the fundamentals of pricing for the new home-based business entrepreneur.
BASIC PRINCIPLES OF PRICING
Here are some basic principles to keep in mind when considering your pricing strategies:
=> Prices must at least cover costs.
If you don't at least cover costs, and this includes an amount for your time, you will incur a loss. If your business is incurring a loss it's a hobby.
=> The best way to lower price is to lower costs
As price equals costs plus profit margin, it's obviously better to reduce the cost element than the profit element if, for any reason, you find that you must reduce your prices.
=> Prices must reflect the environment in which they operate
Any price, whether yours or your competitors', necessarily reflects the dynamics of cost, demand, market changes, competition, product utility, product longevity, maintenance and end use.
=> Prices must be within the range of what customers are prepared to pay
It's all very well having the best bread slicer in the western world but if your price is more than customers are prepared to pay for it, so what? On the other hand, there is absolutely no reason to charge less than customers are prepared to pay either.
=> Prices should be set at levels that will shift products and services and not to beat competitors alone
It's easy when you start delving into all of the sophisticated analysis and research around about optimum pricing levels to forget that, at the end of the day, you set your prices as high as you can while still shifting your products and services. So don't think that keeping pace with competitors is enough. It isn't. You may have competitive advantages that mean you can charge more than your competitor.
=> The price you set should represent a fair return for your time, talent, risk and investment
Don't be coy about demanding a reward for what you bring to the table. Your expertise and talent has objective worth. Don't just give it away. Charge for it.
PRICE = COST + PROFIT MARGIN
The basic price you will strike is simply your costs plus a profit margin. It follows that before you can set your prices you must know exactly what your costs are. Costs fall into three main areas:
=> Direct Costs
Direct costs are those things directly related to the creation of your product such as raw materials, parts and supplies.
=> Overheads
Overheads are business costs not directly related to production and include things such as taxes, rent, office supplies and equipment, business related travel, insurance, permits, repair of equipment, utilities (electricity and telephone) and professional advice (accountant, lawyer).
=> Labor
Labor costs include all wages paid to employees *including yourself*. It's amazing how many home-business owners forget to include their time as a cost of business!
Calculate your labor costs by multiplying the number of hours worked by an hourly wage. You should also include fringe benefits (typically 15% plus).
Once you have ascertained your total costs, add a profit margin. A 15-20% profit margin is standard for most home-based businesses. Although you have included your own wages in your labor costs, if you don’t add a profit margin there will be no money for growth or expansion of the business.
RELATIONSHIP BETWEEN PRICES AND PROFITS
The easiest way to increase your profit is to raise your prices. But you can’t just raise prices indiscriminately. Look for ways to manipulate niche pricing instead. This means looking for specific areas of your business where you have some latitude to increase prices.
The way to do this is to identify the areas where the perceived value of what you are offering is higher than the price you are currently charging. Start by carrying out a competitive analysis of your business. Find out how your product compares with your competitors’ on the basis not only of price but costs as well.
If you are going to source this information by approaching competitors directly, a word of caution ... DON’T. The Sherman Act in the US (and similar legislation in many other jurisdictions) prohibits businesses of any size from entering “contracts, combinations or conspiracies” in restraint of trade. In other words, it’s illegal to make deals with competitors about what price you’ll charge or what services you’ll offer. Merely discussing prices with competitors can be construed as an attempt to conspire on prices. This is one area where you just don't want to give even the *whiff* of an impression of doing anything of the sort.
So, be circumspect in your research. Never discuss prices with competitors and avoid frequent communications with them at all if possible. Instead, to keep tabs on what your competition is up to, read their ads, talk to their suppliers, engage mystery shoppers or send an employee to make observations.
Once you have completed your competitive intelligence, analyze your competitive advantages and disadvantages. If, as a result of your analysis, you learn than you have an advantage over your competition because your business is website design and you know how to do cgi-scripting but your competition has to outsource this function and this means a delay of one to two weeks, then this advantage is something your customers will likely pay more for. Adjust your prices accordingly.
WHEN YOU'RE THE PRODUCT
Some businesses don’t offer tangible products at all. Sometimes, YOU are the product. So, how do you price yourself if you’re, say, an ecommerce consultant and your business is assisting brick and mortar businesses make the transition to ecommerce?
One perfectly reasonable approach is to start with a calculation of your actual expenses and your salary needs and then divide the total by a reasonable estimate of billable hours. An article entitled "Setting Fees" by David Dukoff gives a good overview of how to go about doing this.
Let’s say your expenses and salary needs mean that your business needs to be generating $100,000 a year. Let’s also say you prefer to charge clients by the hour rather than by quoting on projects. How much do you need to charge per billable hour to generate $100,000 per year?
Dukoff uses the following approach. To start with, how many billable hours do you have? Let’s start with 2,080 work hours in a year. Deduct 100 hours for vacation time (2 weeks), a further 80 hours for popular holidays, 40 hours personal time and sick leave and 20-40% of time for marketing and administration. This leaves you with around 1,000 billable hours in a year. You therefore need to charge $100 per billable hour to achieve your goal of $100,000 income.
OTHER PRICING STRATEGIES
Other pricing strategies to include in your structure include discounts to encourage prompt payment or quantity purchases, seasonality issues (for example, end of season “sales”), offering senior citizen and student discounts and other promotional incentives.
As you can see, setting the "right" price for your products and services is absolutely crucial to the profitability (read survival) of your business in the longer term. But with careful analysis and a methodical approach, you should be able to arrive at reasonable pricepoints without too much difficulty. Then it's just a matter of monitoring demand in response to price changes to settle on the optimum pricing for your business.
But don't rest there. Your prices operate within a constantly changing environment and you need to be ever-vigilant to ensure that your prices remain at their competitive maxima.
One final piece of advice: if in doubt, price high rather than low. It is much easier to discount prices than it is to increase them.
------
Elena Fawkner is editor of A Home-Based Business Online ... practical business ideas, opportunities and solutions for the work-from-home entrepreneur. http://www.ahbbo.com
Mending Fences
My fence blew down last weekend, well two panels and one fencepost did. Obviously I did what any sensible person would do and ignored it until the other half suggested 'action this day'. I examined the damage, kicked it a bit and decided to visit Wickes Builder's Merchants (because they're nearest).
Happily, they had the panels and the post and the chap sold me a bag of 'Postcrete' which is concrete that sets in 10 minutes, which must be useful for the mafia if they still use non-flotation aids these days. He didn't have any stuff to melt the old concrete around the post stump, which looks like it weighs 2 tons, but did suggest a sledgehammer which was also in stock at a price!
The dilemma was, how to get the panels home, but my new mate had an answer for that as well; he could deliver it for a small consideration (£15 actually). Great! problem solved. Goods were duly delivered and I am now the proud owner of a selection of building materials that will be enthusiastically brought into play as soon as 'er indoors' remembers I haven't finished the job yet.
You will have realised by now that my new mate at Wickes wasn't a 19 year old monosyllabic individual (this describes my eldest son, except when he's with his mates, when he transforms into life & soul etc.) , but a mature type anxious to satisfy the customer need. What impressed me was his enthusiastic up-selling of additional product, equipment and delivery. Although my house is about 1.5 miles from Wickes, the delivery seemed good value as 6x6 feet fence panels will fit in very few cars. For me then, the price was right!
To learn how to make your prices irresistible Click Here!
Happily, they had the panels and the post and the chap sold me a bag of 'Postcrete' which is concrete that sets in 10 minutes, which must be useful for the mafia if they still use non-flotation aids these days. He didn't have any stuff to melt the old concrete around the post stump, which looks like it weighs 2 tons, but did suggest a sledgehammer which was also in stock at a price!
The dilemma was, how to get the panels home, but my new mate had an answer for that as well; he could deliver it for a small consideration (£15 actually). Great! problem solved. Goods were duly delivered and I am now the proud owner of a selection of building materials that will be enthusiastically brought into play as soon as 'er indoors' remembers I haven't finished the job yet.
You will have realised by now that my new mate at Wickes wasn't a 19 year old monosyllabic individual (this describes my eldest son, except when he's with his mates, when he transforms into life & soul etc.) , but a mature type anxious to satisfy the customer need. What impressed me was his enthusiastic up-selling of additional product, equipment and delivery. Although my house is about 1.5 miles from Wickes, the delivery seemed good value as 6x6 feet fence panels will fit in very few cars. For me then, the price was right!
To learn how to make your prices irresistible Click Here!
Saturday, December 09, 2006
Three Ways of Pricing
Although retail pricing is a fascinating subject in itself, B2B pricing is equally interesting. Where your business sits in the distribution chain and how long that chain is influences how you set your pricing strategy.
There are probably just three basic ways you can price:
- Cost plus: this is where you decide how much profit you want to make from a given product and you apply the margin to the cost.
- Competitive pricing: this is where you check out your competitors and price against them, or just below.
- Value pricing: this is where you look at your total proposition and charge a fair price for the service you provide. Wikipedia decribes it as follows: "value pricing is the practice of setting prices based on the value of a product to the customer, in contrast with other approaches such as pricing based on cost"
Of course, you will probably say that you use a combination of 1 and 2. You calculate your margin to arrive at a price, then you sanity-check it against the competition and tweak it as necessary.
If you use a combination of all three, you can stop reading now and go back to counting your money, which must be a full time job for you. For those of you still with me, here are what I see as the strengths and weaknesses of each.
Cost Plus:
If you just use this system you will be flying blind in the market. You may well be successful, or even very successful, but you will never know if you could have made more profit, or if you could have sold more product. On the plus side you will definitely make your budgeted gross margin on your sales. Whether you will make and net profit will depend on your total sales value and your overheads.
Competitive:
If you use this system you will certainly know a lot about your customers and competitors, that is, assuming that your market intelligence is accurate. You will of course be aware of what a full-time job it is just to keep up with constantly changing pricing in the market. Your competitors continually discover your pricing structure, match or better it and you are back to square one, re-pricing again.
The up side is that you will often be competitive and will probably make good sales numbers, what a pity that the monthly accounts don’t look so healthy and the gross margin is down again and you’ll have to look at cutting costs to keep in front.
Value Pricing:
This pricing system takes account of both competition and cost, then applies it your business proposition. It takes account of all the advantages your business has over the competition and charges a premium, however modest, for this.
Because it is carefully applied, it is justifiable, more than that, it’s a sales proposition that can be marketed to your customers as an advantage to them. The downside to this is that it requires some careful planning and enough conviction to make it work; other than that, it’s all positive, more sales at higher margins.
How does it work?
For example, lets assume that you are a wholesaler and you sit between the manufacturer and the retailer. The retailer could buy directly from the manufacturer, so why wouldn’t he?
- Space restriction for minimum order value
- Tight cash flow
- Lack of category knowledge
- Multiple suppliers needed to cover the category
A wholesaler can consolidate from different suppliers and supply little and often. To the retailer that means:
- Reduced inventory
- Improved cash flow
- Less administration (one account)
- Less sales people to see
- More time to spend with customers
Why wouldn’t he pay a premium for all that?
If you’re really good, you could provide category management for the customer, recommending which products to stock, how to display them and of course, how to price them! To do this properly, you have to be truly independent, know what you’re talking about and recommend what will sell, rather than what you make the most margin on.
The principles of value pricing can be applied to any business, but the key is to properly analyse your business and fully understand what your proposition really is. If you don’t have a clear proposition, it’s probably time you did!
Friday, December 08, 2006
Perceived Value Is In The Eye Of The Beholder
Pricing is an important aspect of every business because price is used to create financial projections, establish a break even point, and calculate profit and loss. It's also important to establish a good price point from the beginning because it is much easier to lower prices than to raise them.
Q: My partner and I are having a hard time coming up with what we feel is the perfect price for our new product. We know what competing products sell for, but we don't know if it's better to price our product cheaper than theirs or charge more based on what we think is a superior product. What is the best way to determine the perfect price and what is the rule of thumb for raising prices later on? -- Jennifer L.
A: Like the perfect man, the perfect plan, and the perfect murder (not sure what those three have in common, but there is a link there somewhere), there is no such thing as the perfect price. There is that mythical price that gives the customer excellent bang for his buck and the company excellent profits for its efforts, but even that price point can't be considered the perfect price. That's called compromise, not perfection.
Pricing is an important aspect of every business because price is used to create financial projections, establish a break even point, and calculate profit and loss. It's also important to establish a good price point from the beginning because it is much easier to lower prices than to raise them. If you introduce a product at $100 and make no sales, you can easily lower the price to $75 without attracting much attention. However, if you introduce the product at $75 and it proves popular and you raise the price to $100, you may face irate customers and even be accused of price gouging. So it's better to start high and adjust down, if need be.
There really is no rule of thumb when it comes to raising prices. Price is never set in stone and consumers expect prices to change with the times. You might raise prices to cover an increase in the cost of manufacturing and other production costs, or in response to market demand (the greater the demand, the higher the price). You can also justify a price increase when you improve a product's quality, features and benefits. The buying public is generally price conscious, but if you can show that the value of your product has increased by the addition of new features and benefits, then the public will usually not balk at an increase in price. Keep in mind that price increases should be done in small increments over time, not by significant amounts over night.
Though price may be determined by any number of factors, basically there are three ways to establish the price for your product.
The first way to determine price is to perform a comparative analysis on similar products sold by competitors. Are the features and benefits similar to your product's? If so, use the price of the competing product as a possible price point for your product. If your product is superior in quality, features and benefits, then you might be able to justify a higher price and still be competitive. If your product is inferior, then your price point will be less.
The second way to establish pricing is to calculate the total cost to produce and deliver your product, then figure in an acceptable margin of profit to calculate the final price.The third way to establish a price it to use what I call "The David Copperfield Method." Named after the famous magician who made the Statue of Liberty disappear on national TV, this method of pricing simply means that you pull the price out of thin air. Believe it or not, this is the method that many companies use to establish pricing. It's also the reason many companies disappear.It's easier to understand the allure of the Copperfield Method when you realize that more often than not, product pricing comes down to one thing: perception.
Perception, or as it is more commonly referred to in business, perceived value, is one factor that most entrepreneurs use to determine product pricing. As entrepreneurs, our products are our children. We create them, we nurture them, we grow them and we love them. And often we perceive their value to be much greater than the market perceives it to be.It's all about the perception of value. What makes a $10,000 Rolex watch more valuable than a $10 Timex? Functionally both are watches and both perform the exact same function: they tell time. Why then does one sell for a thousand times more than the other? Perceived value, nothing more.
An expensive wristwatch can not make you better looking, smarter, healthier, or more popular with the opposite sex. But the perception is that if you have a Rolex on your arm you must have something going for you that the wearer of a $10 Timex does not.
By the way, does anybody have the time? My Timex seems to have stopped...
Here's to your success!
Tim Knox tim@dropshipwholesale.net For information on starting your own online or eBay business, visit http://www.dropshipwholesale.net
Source: http://www.articleavenue.com
Q: My partner and I are having a hard time coming up with what we feel is the perfect price for our new product. We know what competing products sell for, but we don't know if it's better to price our product cheaper than theirs or charge more based on what we think is a superior product. What is the best way to determine the perfect price and what is the rule of thumb for raising prices later on? -- Jennifer L.
A: Like the perfect man, the perfect plan, and the perfect murder (not sure what those three have in common, but there is a link there somewhere), there is no such thing as the perfect price. There is that mythical price that gives the customer excellent bang for his buck and the company excellent profits for its efforts, but even that price point can't be considered the perfect price. That's called compromise, not perfection.
Pricing is an important aspect of every business because price is used to create financial projections, establish a break even point, and calculate profit and loss. It's also important to establish a good price point from the beginning because it is much easier to lower prices than to raise them. If you introduce a product at $100 and make no sales, you can easily lower the price to $75 without attracting much attention. However, if you introduce the product at $75 and it proves popular and you raise the price to $100, you may face irate customers and even be accused of price gouging. So it's better to start high and adjust down, if need be.
There really is no rule of thumb when it comes to raising prices. Price is never set in stone and consumers expect prices to change with the times. You might raise prices to cover an increase in the cost of manufacturing and other production costs, or in response to market demand (the greater the demand, the higher the price). You can also justify a price increase when you improve a product's quality, features and benefits. The buying public is generally price conscious, but if you can show that the value of your product has increased by the addition of new features and benefits, then the public will usually not balk at an increase in price. Keep in mind that price increases should be done in small increments over time, not by significant amounts over night.
Though price may be determined by any number of factors, basically there are three ways to establish the price for your product.
The first way to determine price is to perform a comparative analysis on similar products sold by competitors. Are the features and benefits similar to your product's? If so, use the price of the competing product as a possible price point for your product. If your product is superior in quality, features and benefits, then you might be able to justify a higher price and still be competitive. If your product is inferior, then your price point will be less.
The second way to establish pricing is to calculate the total cost to produce and deliver your product, then figure in an acceptable margin of profit to calculate the final price.The third way to establish a price it to use what I call "The David Copperfield Method." Named after the famous magician who made the Statue of Liberty disappear on national TV, this method of pricing simply means that you pull the price out of thin air. Believe it or not, this is the method that many companies use to establish pricing. It's also the reason many companies disappear.It's easier to understand the allure of the Copperfield Method when you realize that more often than not, product pricing comes down to one thing: perception.
Perception, or as it is more commonly referred to in business, perceived value, is one factor that most entrepreneurs use to determine product pricing. As entrepreneurs, our products are our children. We create them, we nurture them, we grow them and we love them. And often we perceive their value to be much greater than the market perceives it to be.It's all about the perception of value. What makes a $10,000 Rolex watch more valuable than a $10 Timex? Functionally both are watches and both perform the exact same function: they tell time. Why then does one sell for a thousand times more than the other? Perceived value, nothing more.
An expensive wristwatch can not make you better looking, smarter, healthier, or more popular with the opposite sex. But the perception is that if you have a Rolex on your arm you must have something going for you that the wearer of a $10 Timex does not.
By the way, does anybody have the time? My Timex seems to have stopped...
Here's to your success!
Tim Knox tim@dropshipwholesale.net For information on starting your own online or eBay business, visit http://www.dropshipwholesale.net
Source: http://www.articleavenue.com
6 Things that business people should know, but often don’t
- A gross margin is not the same as a mark-up. If a product costs £1.00, a mark-up of 33% will produce a selling price of £1.33, which is a gross margin of 25% ((£1.33 - £1.00) / £1.33).
- If you want a gross margin of 33%, take the cost price of £1.00 and divide it by 0.67, (100 – 33 / 100) which equals a price of £1.49. If you want a GM of 40%, then divide by 0.60, (100 – 40 / 100), which equals £1.67.
- If you have vat inclusive price and you want to arrive at the pre-vat net figure, divide it by 1.175 (for the UK vat rate of 17.5%, or if the vat rate is 12.5%, then divide it by 1.125). For example, is the price inc. vat is £3.99, then the net price is (3.99 / 1.175) = £3.40.
- To calculate your gross margin from a vat inclusive selling price, first take off the vat using the calculation in No3. Then find the cash margin by taking the cost from the selling price (less the vat) and divide it by the selling price. So if the selling price is £1.99 inc vat and the cost is £1.00, that calculation is: (1.99 / 1.175) - £1.00 / (1.99 / 1.175) = 41%.
- Assume your gross margin is 33.3%. If you have a sale and reduce your selling price by 10%, you will have to sell 43% more units to make the same cash margin. For example, if your cost is £1.00 and your selling price £1.50 + vat, for every 100 units you will make £50 gross profit. If you reduce your price by 10% to £1.35 + vat, you will need to sell 143 units to make £50 gross profit. The required increment varies according to the base GM%, so if your gross margin were 50%, you would have to increase unit sales by 25%.
- ‘Price’ is what you sell at and ‘cost’ is what you buy at. If you always use these terms in your business you will avoid the frequent mistake of selling goods at your cost + vat and maybe, buying at your selling price!
Want to raise prices and keep your customers? Click Here!
Thursday, December 07, 2006
Makes you wonder ...
Have you ever wondered how manufacturers and distributors set their pricing?
After more years in the UK automotive aftermarket than I care to remember, most business to business (B2B) pricing strategies remain a complete mystery to me (and also to their architects I believe). Rather than expend effort learning about their market, customers and competitive position, they sit in an office and set their pricing based on cost, guesswork, history and that impostor, ‘instinct’.
In the UK automotive aftermarket parts world, with just a few notable and successful exceptions, low pricing is king. Not to the end consumer of course (who is striped-up to some tune with the myriad of snouts that get into the trough before he gets his carefully calculated bill from Joe Bloggs Motors Ltd - name is completely fictional to protect the guilty!), but through the distribution chain.
It’s not that keener pricing will save money for the beleaguered motorist because, let’s face it, Mr Motorist is going to pay full-whack whatever. It’s about how the margin is distributed along the chain and, for some reason, the guys with the inventory and the sales teams tend to have the lowest margins.
Here’s a suggestion: look at where your business adds value to the distribution chain and work at enhancing that. It may be delivery frequency, inventory, product quality, call-centre staff or easy website ordering. Stop trying to be the cheapest and try to be the best. If you really can’t add value, find something else to do!
You can’t always be the cheapest and if you are, you won’t be for long; if pricing is the main thrust of your success strategy, it’ll fail, sooner rather than later.
The Deadly Sin of the Independent Retailer: spending most of their time buying instead of selling and precious little of their time on strategic pricing – I know this from experience of retailers up and down the UK. If retailers spent as much time selling as they do buying, they’d all be millionaires!
Keep this in mind: the big profit is made on the selling price, not the buying price!
There’s not much point in spending two hours negotiating £0.02 off the buying price of an air freshener and then selling it at £0.50 or £1.00 less than Halfords – but retailers do, believe me! How many consumers know or care about the price of an air freshener?
After more years in the UK automotive aftermarket than I care to remember, most business to business (B2B) pricing strategies remain a complete mystery to me (and also to their architects I believe). Rather than expend effort learning about their market, customers and competitive position, they sit in an office and set their pricing based on cost, guesswork, history and that impostor, ‘instinct’.
In the UK automotive aftermarket parts world, with just a few notable and successful exceptions, low pricing is king. Not to the end consumer of course (who is striped-up to some tune with the myriad of snouts that get into the trough before he gets his carefully calculated bill from Joe Bloggs Motors Ltd - name is completely fictional to protect the guilty!), but through the distribution chain.
It’s not that keener pricing will save money for the beleaguered motorist because, let’s face it, Mr Motorist is going to pay full-whack whatever. It’s about how the margin is distributed along the chain and, for some reason, the guys with the inventory and the sales teams tend to have the lowest margins.
Here’s a suggestion: look at where your business adds value to the distribution chain and work at enhancing that. It may be delivery frequency, inventory, product quality, call-centre staff or easy website ordering. Stop trying to be the cheapest and try to be the best. If you really can’t add value, find something else to do!
You can’t always be the cheapest and if you are, you won’t be for long; if pricing is the main thrust of your success strategy, it’ll fail, sooner rather than later.
The Deadly Sin of the Independent Retailer: spending most of their time buying instead of selling and precious little of their time on strategic pricing – I know this from experience of retailers up and down the UK. If retailers spent as much time selling as they do buying, they’d all be millionaires!
Keep this in mind: the big profit is made on the selling price, not the buying price!
There’s not much point in spending two hours negotiating £0.02 off the buying price of an air freshener and then selling it at £0.50 or £1.00 less than Halfords – but retailers do, believe me! How many consumers know or care about the price of an air freshener?
Wednesday, December 06, 2006
Pricing for Profit
Welcome to Pricing for Profit. Arguably the most important issue for any business is to optimise its selling prices, yet so many businesses pay scant attention to pricing strategy. Get it right and it will drive additional net income – straight onto the bottom line!
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