Establishing prices for products can be a challenging task for home-based/micro business owners. Under-pricing is one of the most common mistakes made. Entrepreneurs often underestimate the value of their time and expertise and find it difficult to believe that customers will actually pay the price needed for the producer to make a profit. The best price is not necessarily the one that will create the most business; it is the price that will maximize profits.
Considerations in setting price include recovery of both direct and indirect costs, adequate salary for the owner, markup for profit and what the market will bear, i.e., the amount the buyer is willing to pay. There are several approaches to establishing a pricing policy including value pricing, competitive pricing and cost pricing. Consider this information.
* The uniqueness of a product and the ability of the producer to customize it for the buyer provide an opportunity for the entrepreneur to charge more for the item. If the buyer perceives the product to be of excellent quality or if the producer is highly regarded in her or his field, this approach can allow for maximum profits. The value pricing approach is best used when there is little or no competition. As competitors enter the market, the producer may need to review and revise the product position to maintain the image and unique qualities that were used to establish the product.
* Competitive pricing is an approach that can be used when the products offered are similar to what is being offered by others. This approach prices the products within the same price range as the competition. If you select this approach, study the competition to determine what your product can offer that is different or better than the competition.
* The cost pricing approach is one of the more commonly used since costs are a prevailing element when setting prices. Total costs include both direct costs and indirect costs. Direct costs include all the materials, parts and supplies that are used in the actual production of the product. Direct costs should be exact and, if applicable, should make allowances for waste. For example, if the product requires 9 yards and 28 inches of trim, a minimum of 10 yards would be purchased with 8 inches of waste. Purchasing materials in bulk can help reduce the amount lost to waste. Indirect costs include the costs of running the business. These are also referred to as overhead expenses. These would include such things as utility payments, insurance, property taxes and business licenses.
* Home-based business owners frequently fail to factor in the costs of their labor when pricing a product. Determine what you want as an hourly wage. Multiply this by the number of hours worked to produce the product. Keep accurate records as to the amount of time it takes to produce the product. If you have several of the same items to produce, mass production techniques help reduce labor costs.
* Business owners may not sell all their products at a regular price. There will be items that will need to be marked down. Owners should attempt to achieve cost recovery with markdowns. However, if a product is a “loser” or if it will become outdated, it is best to close it out at a reduced price, even if it involves taking a loss.
Business owners should review their pricing strategies each year and make adjustments as needed. Remember also that costs will increase due to inflation.
By: Karen Biers - Jan. 22, 2008