Key Components of Pricing

Like most disciplines in business, there are a number of fundamental elements to developing a pricing strategy.  Without going into a great amount of detail, our recommendation is to create a worksheet that summarizes some basic research in the following areas:  costs, competitive pricing and pricing goals.  Just being aware of these elements could help you review – and possibly modify – your current pricing model and help your team communicate their individual priorities. 

Figuring Your Costs, Figuring Your Margins
Probably the first step in pricing is to figure your costs of delivering a product or service on a unit basis.  This calculation will include such items as product (or raw material) acquisition costs, any costs of conversion, handling, manufacturing and other finishing charges.  Don’t forget to calculate shipping costs and any other cost it takes to get your product into the hands of the customer.  After arriving at this number, add in a gross profit amount – which may be a rough guess of what you think is an acceptable return.  This will be your estimated selling price.  Finally, to arrive at your contribution margin, figure in any transaction costs such as sales commissions, warranties, rebates and other incentives as a percentage of the total unit cost you have just calculated. 

Competitive Pricing
Another step in reviewing your pricing plan is to analyze those of your competitors.  A simple review will provide you with a list of competitor products and their pricing for those products.  A more in-depth analysis shows whether they offer extended terms, third party leasing or purchase incentives.

Don’t forget to make sure that you are comparing apples-to-apples when performing your competitive pricing review.  As part of the process, prepare a product feature chart comparing your product with those of the top companies in your market.  If a competitor is selling a product that only slightly overlaps with your own feature set, you need to take that into account when comparing pricing with that product.

Pricing Goals
Everyone knows that pricing is dynamic; it changes for any number of reasons at any given time.  The most important aspect of dynamic pricing is to have a goal or strategy in mind before you institute or change prices – many times, you can’t change them back!  Consider the following list of pricing objectives to see which best describes one or more of your current pricing goals:

• Generating immediate cash
• Maximizing profit
• Achieving targeted returns
• Stabilizing demand to avoid issues of hypergrowth
• Impact market share
• Impact branding and awareness
• Organizational survival
• Closing out a product line
• Market penetration

Although most of us have been guilty of it, it is a good idea not to “shoot from the hip” when it comes to pricing.  Like any other planning, a studied approach is best, if for no other reason than to show you the impact of your thinking!