If you are in retail or reselling business, setting price is not a concern, but if you are the manufacturer or producer, or if you are going to provide some sort of services then setting price can be a very difficult job. At times, new startups set prices in a hurry and focus more on making sales, only to find later that even though they’ve made good enough sales, the accumulated profit is not up to the mark. That is why when setting prices; you need to keep each and every cost in mind, along with adjusting the variables like competitor’s price and consumer’s purchasing power into the price. A price too low would bring more sales but no profits, whereas a price too high will bring large profits but very few sales (unless you enjoy some sort of monopoly). Therefore, the price needs to be spot on.
Rule of thumb when setting prices:
Try to kill your competition by setting low price, but make sure you are not choking your own business of profits. Whatever pricing model you use for pricing your products or services just remember this one point; you’ve got to set a price that will give you an edge over your competitor, still providing you with much needed cash to cover your costs while earning some profits. One more thing, the price you set initially is not something written on stone, it can be changed and it should be changed if the initial price doesn’t prove to be the right one for any reason.
Costs & Expenses:
The price should cover the cost of production and advertisement, that’s simple and everybody knows that. Where most businesses go wrong is when they are calculating their costs of doing business, they often overlook the possibility of some future expenses or completely ignore one or two indirect expenses (transportation & depreciation, etc). Therefore, before you start calculating the right price, you must be having an idea of all costs or expenses that will occur in course of business.
Different Prices for Different stages:
If you are just starting, your first goal must be to enter the market and capture as much market share as you can. At this point of time, you probably need a price as low as possible; some businesses even take a risk of setting a price lower than their break-even point. However, once you’ve managed to make inroads, you can raise your price, later when you’ve established as a well known brand, you can always set a price that offers maximum profits.
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