Pricing your products

© 2012 CAPBuilder Network Group All rights reserved© 2012 CAPBuilder Network Group All rights reserved
PRICING YOUR
PRODUCTS/SERVICES

THE DIFFERENCE BETWEEN COST
AND VALUE
•The cost of your product or service is the
amount you spend to produce it
•The price is your financial reward for providing
the product or service
•The value is what your customer believes the
product or service is worth to them

THE DIFFERENCE BETWEEN COST
AND VALUE
• For example, the cost for a plumber to fix a burst pipe at a customer's
home may be $5 for travel, materials costing $5 and an hour's labor at
$30.
• However, the value of the service to the customer - who may have
water leaking all over their house - is far greater than the $40 cost, so
the plumber may decide to charge a total of $100.
• Pricing should be in line with the value of the benefits that your
business provides for its customers, while also bearing in mind the
prices your competitors charge.

To maximize your profitability, find
out:
• What benefits your customers gain from using your product or
service
• The criteria your customers use for buying decisions - for example,
speed of delivery, convenience or reliability
• What value your customers place on receiving the benefits you
provide
• Wherever possible, set prices that reflect the value you provide - not
just the cost.

COVERING FIXED AND VARIABLE COSTS
• Divide your costs under two headings:
• fixed costs are those that are always there, regardless of how
much or how little you sell, for example rent, salaries and business
rates
• variable costs are those that rise as your sales increase, such as
additional raw materials, extra labor and transport
• When you set a price, it must be higher than the variable
cost of producing your product or service. Each sale will then
make a contribution towards covering your fixed costs - and
making profits.

COST-PLUS VERSUS VALUE-BASED
PRICING
•There are two basic methods of pricing your
products and services: cost-plus and value-
based pricing.
•The best choice depends on your type of
business, what influences your customers to
buy and the nature of your competition.

Cost-plus pricing
• This takes the cost of producing your product or service and
adds an amount that you need to make a profit. This is
usually expressed as a percentage of the cost.
• It is generally more suited to businesses that deal with large
volumes or which operate in markets dominated by
competition on price.
• But cost-plus pricing ignores your image and market
positioning. And hidden costs are easily forgotten, so your
true profit per sale is often lower than you realize.

Value-based pricing
• This focuses on the price you believe customers are willing to pay,
based on the benefits your business offers them.
• Value-based pricing depends on the strength of the benefits you can
prove you offer to customers.
• If you have clearly-defined benefits that give you an advantage over
your competitors, you can charge according to the value you offer
customers. While this approach can prove very profitable, it can
alienate potential customers who are driven only by price and can also
draw in new competitors.

HOW TO BUILD A PRICING STRATEGY
• It's important to find out what your competitors offer and what they
charge. If you phone your rivals and ask them for a quote, you can use
this information as a framework.
• Don’t set your prices too much higher or lower without a good reason.
• If you price too low, you will just be throwing away profit. If you price
too high, you will lose customers, unless you can offer them something
they can't get elsewhere.
• The perception of your product or service is also important.

DIFFERENT PRICING TACTICS
• Discounting
• Offering specially-reduced prices can be a powerful tool. This could be a
clearance discount to sell old stock, a discount for making multiple purchases of
the same or similar products, or you could offer bulk discounts to encourage
larger orders. You should be able to make these more profitable through lower
costs.
• Odd value pricing
• Using the retailer's tactic of selling products for $9.99 instead of $10 can be
useful if price is an essential part of customers' buying decisions. Some
customers perceive odd value prices like this as being more attractive.

DIFFERENT PRICING TACTICS
• Loss leader
• This involves selling a product at a low or even loss-making price. Although you may not
make a profit selling this product, you could attract customers who will also buy other, more
profitable products.
• Skimming
• If you have a unique product or service, you can sell it at a high price. This is known as
skimming - but you need to be sure that what you are selling is unique.
• Penetration
• This is the opposite of skimming - starting at a low price and gaining market share before
competitors catch up with you. Once you have a loyal customer base, you should be able to
find ways to raise prices later

RAISING OR LOWERING PRICES
• There are two key questions you will need to answer:
• What effect will the price change have on the volume of sales?
• What will the effect be on the profit per sale?
• Increasing prices
• Increasing prices can improve your profitability even though your sales volume
may drop.
• If you are increasing your prices, always explain to your customers why you are
doing it. You can use the price change as an opportunity to re-emphasise the
benefits you offer. A good explanation can also strengthen your relationship with
a customer.

RAISING OR LOWERING PRICES
• There are also ways that you can hide price increases. For example, you
might:
• introduce new, higher-priced products or services and make older, cheaper ones
obsolete
• lower the specification - and your costs - while maintaining the same price
• Reducing prices
• You should never take the decision to lower prices lightly. Low prices often go hand-
in-hand with poor-quality service - is this the image you want to create for your
business?
• Concentrate on building profits rather than cutting prices to build up sales. In most
circumstances, your customers decide to buy from you because of the benefits you
offer, along with your price. It is rare for the decision to be made based solely on the
price.

THE PRICING FORMULA
• Materials + Labor + Expenses + Profit = Retail

PARTS OF THE FORMULA
• Materials
• Make sure to cover all your material fees. Often forgotten: the little things
like the cost of thread, and the bigger things like the cost of packaging. If
you’re going to “guesstimate,” err on the higher side!
• Labor
• If someone wanted to hire you and they offered you $7 an hour, what would
you think of that deal

PARTS OF THE
FORMULA
• Jot down every expense you can think of —
for example, office supplies, rent or utilities.
• Next, come up with the number of items
you’d like to sell a month. Divide that
number into the total expenses.

PARTS OF THE FORMULA
• Profit
• Think hard: where do you want this business to go? Do you want
to quit your day job? Do you want to pay off a student
loan? Accounting for profit now will help you get there.
• This number really depends on what you are selling, and will make
up for someone like a printmaker, whose material costs are low,
labor hours might be low, but should be paid for their unique
talent and point of view! I leave this up to you. I’m trusting you
here — don’t disappoint me with a low ball number!

Exercise – lemonade stand
•I want to start a fresh squeezed
lemonade stand that I can take to
different events
•I already have the cart and basic
equipment but not sure how to price my
product.

•Lemonade recipe
•3 lemons
•8 oz of water
•3 spoons of sugar
•1 16 oz cup
•2 scoops of ice

• Material Cost
• Bag of 36 lemons – 22 dollars
• .61 per lemon –(3 per) 1.83 per cup
• Natural sugar 110 ct– $25.15
• .22 per pack - (3 per) - .68
• Cups 50 pack - $8
• .16 per cup - .16
• Ice – 20lb bag (25 scoops) - $4.
• .16 per scoop – (2 per) - .32
• LABOR COST
• $10 PER HOUR
• TAKES 3 MIN TO MAKE A CUP
• $10 / 60 MIN = .16 PER MIN
• 3 MIN X .16 = .48 OR .50 PER CUP

• Labor cost
• $10 per hour
• Takes 3 min to make a cup
• $10 / 60 min = .16 per min
• 3 min X .16 = .48 or .50 per
cup

RETAIL PRICE
CALCULATIONITEM COST
LABOR COST
LEMONS
SUGAR
ICE
CUP
TOTAL COST
MARKUP
RETAIL PRICE

PROJECTIONS
• Projections are based on how many of a unit can you sell in a
month at what price
• Unit price - ___________
• Sold per day - __________
• Sold per week – 6 days x # sold per day = __________
• Sold per month – 4 weeks x # sold per week = __________
• Sold per year – 52 weeks x # sold per month = ________________

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