Download Pricing Goods

Pricing Goods
Presented by
Joanne L. Edgar, CPA
Pricing Goods
• One of the hardest things in running a business
is to price your goods correctly. There is no
exact formula or any one theory/method that
works for each business. Every business is
unique and its customers are different, even
among businesses offering the same goods.
• Today we will start with some economics
and business strategy then talk about the
basic theories or methods and finally some
practical applications and best practices.
Economics/Business Strategy
Supply and Demand
• If demand is up, this forces supply to go down,
which in turn will drive market price to rise
• If demand is down, this forces supply to go up,
which in turn will drive market prices to drop
• Supply and Demand can be driven by all kinds
of factors – but the effect is the same
Economics/Business Strategy
Market position
• Understanding your market position or the market
position you wish to have is critical to setting prices.
• You can be high quality and high price or you can be
low quality and low price. Nothing else in between
will work. Or it won’t work for long and will lead to
your failure.
• Price alone doesn’t drive sales.
Case in Point
• Apple – strategy is to provide high quality
products at the highest price in the
market. Built market share based on
quality and used price to perceive quality
and build brand loyalty.
• Wal-Mart – low quality products at the
lowest prices. Again building brand
loyalty with price.
Market position
• It’s the Triangle of Truth– where you can
be two points/sides but never all three.
(Good, fast, cheap)
Who is your customer?
Defining your customer is critical to setting your
price.
• Who needs and will pay for my goods?
• Can or should I narrow my customer base?
• Do I offer different goods for different
customers?
• Where are my customers located and how do I
market and sell to them?
Economics/Business Strategy
Strategy -What are you after?
• Market share, profits, sales growth?
• Are you trying to supplement other
products or profit leaders, customer
retention?
• Or are you trying to keep competitors out?
Industry Standards
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Retail
Wholesale
Hotel rooms
Air travel
Websites – Publications – Advertising
Commodities
Software
Pricing Theories/Models
Cost Based Pricing
• Cost plus method – a profit margin is added
on the goods cost
• Target pricing – the price is determined at the
point that yields the firm’s target rate of
return on investment
Cost Based Pricing
• Contribution analysis – a deviation from the
break-even analysis, where only the direct costs
of a product or service are taken into
consideration
• Marginal Pricing – the price is set below total
and variable costs so as to cover only marginal
costs
Cost
• Direct or marginal cost
– Parts/Labor
• Indirect or variable cost
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Indirect labor
Supplies/Packaging/Caring costs
Machine costs
Factory costs
• Overhead
– Selling/Marketing/General
Pricing Theories/Models
Market Based Pricing
• Pricing similar to competitors or according to
the market’s average prices
• Pricing above competitors
• Pricing below competitors
• Pricing according to the dominant price in the
market
• Pricing at what the market can bear
Pricing Theories/Models
Value Based Pricing
• Pricing at the perceived value to your customer
• Pricing at your level of quality
• Psychological pricing – set to a certain price
where the customer perceives the price to be fair.
• Odd pricing – using figures that end in odd
numbers, customer rounds down.
Value Based Pricing
• If you don’t charge enough the perception of
the value of your product will go down.
• If you charge too much the perception of
value of your product will go down.
Value Based Pricing
• How can both be true? Customer perception is
already set. Meaning they have a value and price
already in mind, your job is to mind read what the
maximum price is for the value you are delivering to
that customer.
• Are customers always right? Yes! – this is where your
market strategy is critical – you can train some
customers on value but not many – pick the right
market/customer for your product/price or change
product/price to match the customer you want.
You have your price – now how do you
move forward?
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Monitor – cost – the market – your competition
Increase
Add value/new product/different mix
Be ahead of competition and if you are not,
reacting quick is key
Resources
• CWBANH.COM
• NHSBDC.ORG
• NHECONOMY.COM (division of NH
Economic Development)
• NHES.NH.GOV – NH Employment
Security Local Data/Analysis
• PAULCOLLEGE.UNH.EDU
• ABINH.ORG
Resources
• SBA.GOV
• Economic Indicators – CENSUS.GOV
• Employment statistics – BLS.GOV (Bureau of
Labor Statistics)
• INC.COM
• JEDGARCFO.COM
Contact Information
Joanne L. Edgar, CPA
J. Edgar Group PLLC, CFO Consulting Services
1361 Elm Street Suite 308, Manchester NH 03101
• Direct 603-792-3202
• Cell 603-289-5243
• Email [email protected]
• Please mention the class when you call/email