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• 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– 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?

• 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, CPAJ. Edgar Group PLLC, CFO Consulting Services1361 Elm Street Suite 308, Manchester NH

03101• Direct 603-792-3202• Cell 603-289-5243• Email joanne@jedgarcfo.com• Please mention the class when you

call/email