So, what is a price? It’s an indicator of the company producing and or selling the product or service. A competitive high price is an indicator of the company saying the product or service is worth it or it’s the company’s thinking that enough customers will pay it. From the customers’ perspective when the customer buys a product or service it’s the customer indicating that the price is OK and in all likelihood it will be bought again. So, when it’s the right price the producers will produce it repeatedly and the customers will buy it repeatedly.
As you look at pricing one thing you must consider is the ability to adjust price when necessary without affecting he price of upsetting customers. You don’t want price to change frequently and to change on the upward side. It’s usually better to increase the price as rarely as possible, but not delay it so much that you lose sales or hit the markups in the meantime.
Pricing tactics and prices will change constantly and increasingly change more frequently. It’s usually not a good idea to change prices in retail frequently especially if the customers watch the increases.
You will usually see the formula of what makes up price: Price = costs plus markup. While that’s typically right it’s only a superficial view of it. Let’s go further and look at what makes up costs and markup. It’s really critical to “fully allocate” a cost per unit from the total costs. That is, you have to take the total cost of a part of a product or service that the company needs to use and then divide it by the number of units produced or delivered.
Specifically, if the total uniform cost to the company is $150,000.00 and you sell 1,000,000 units, the price component is $.15 per unit allowed for uniforms (divide $150K into 1M units).
An example tells this story best:
What makes up the price of an In-n-Out Double-Double burger which was recently $3.35 (without tax)? The following costs or expenses that have to be paid by I&O a component of the total cost needs to be allocated to the final price, so the components of the $3.35 are:
Raw materials Human resources (hiring, firing, training)
Supplies Rent or mortgage
Legal services Financial Services
Repair services Patents
Storage Waste pickup
Cleaning Research and Development
At this point the company is still below breakeven, or also said loss. Two additional components that should go in and all prices that many ignore or forget are:
Profit Discount allowance
It’s not unusual for marketers, executives to forget the last two, that’s remarkable, that’s what companies are all about…making profit, without it the company and executives are in the “hot-seat.” If you don’t have an “allowance” for profit and discount you won’t stay in business very long and you won’t be able to adjust prices to respond to or allow for or stimulate demand.
When determining the amount of profit you want that will be either based on percentage or a flat dollar (or cent) basis. So, for example, each burger may have $.11 attached to it for profit.
Be sure to figure out an allowance for discount in case you have to drop the price for a while and you don’t want to modify any of the other price components. By having an allowance for discount, let’s say $.25 for example, if you want to stimulate demand you might drop the price $.15 and still not go into a loss situation. It also enables you to respond to competitors dropping their price without digging into profit or other costs. One very good thing about having a built in allowance for discount (or increases in costs) is that if you don’t have to…