Introduction to Pricing

The price of your product or service is an important decision you must make when going into business for yourself. There are a number of factors to consider when determining the price of your offering.

• The customer must consider the price in relation to the product or service recieved to be a superior value (whether its the lowest price on the market or not). To learn about value pricing, visit Business Resource Center > Marketing/Sales > Value Pricing
• It must be competitive enough to avoid customers defecting to your competitors while still allowing you to recover your costs and earn a profit
• Indirect costs of ownership must be considered as part of your offering (maintenance costs, troubleshooting, installation, etc.)

Pricing Objectives

Pricing objectives help you define your pricing strategy by outlining where your determined price will be positioned among competitor prices and the market as a whole in relation to your own goals. Common pricing objective include:

Profit oriented

Maximizes profit (practiced over a long time period). Look at total output rather than single items. Uses return on sales, percentage return on sales to net sales, or sales to net investment.

Sales oriented

Percentage increase over previous periods. Might use a lower price to increase market share or to gain a foothold in the market.

Status Quo

Uses price leadership with the leader stabilizing the price or competitive pricing where the others follow the leader.

Market oriented.

1. Skimming - Initially high price then lower price according to demand.
2. Penetration - Lower initial price to gain a market share foothold then, once established, raise prices to meet competition.
3. Premium - Price above competitive price if firm is able to differentiate its product/service as having higher quality, superior features, etc.

Margin oriented

Cost and profit margins on each item are primary consideration.

Pricing objectives are also a key aspect of your Business Plan. View them in the context of your business plan here.

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