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, CPA J. Edgar Group PLLC, CFO Consulting Services 1361 Elm Street Suite 308, Manchester NH Direct Cell Please mention the class when you call/