Pricing 101: The Basics

Marketing is truly an art and a science, and pricing is a perfect example of that. Pricing is one of the most complicated and confusing aspects of business, but one of the most important. It is price that will communicate value to your customers, determine a businesses profit margin and indicate where a product category competes in the market. Price is also the most agile aspect of the four P’s of marketing.

 

Many of the entrepreneurs I work with struggle with pricing their products, usually pricing their products below average to have a low cost advantage. This is not the best strategy to take, particularly for technology start-ups, it is a receipt for failure. 

 

There are many different strategies for determining pricing; we will talk about them later in this blog. However, there are a few key concepts that need to be considered first.

A product or services price needs to cover the cost of merchandise and give enough of a mark-up to cover operating expenses and yield a profit. To do so, a marketer needs to estimate both expenses (fixed and variable) and profits based on a sales forecast. This is very hard for new ventures, as there is no bench mark, so lots of assumptions need to be made and the initial price will likely be wrong the first time around (thank goodness price is the easiest thing to change in an early stage of a business).  I recommend that start-ups charge more than the first iteration of price, because it is easier to go down in price then to go up.

 

 

How do you know what profit margin to charge? It depends on the nature of your business. Department stores that turnover products rapidly and are in the business of selling in volume have lower margins (think Dollarama and grocery stores), fashion products have a slower turnover time and will require higher margins. You need to think about how fast your products will sell, and for start-ups, products will sell slowly in the beginning and higher margins will be required to survive. Consumer products need to plan for price reductions as well, as many shoppers will only by with a promotion.

 

Here are some helpful formulas:

·      Retail Price = Cost + Markup

·      Cost = Retail Price – Markup

·      Markup = Retail Price – Cost

·      Initial Markup Percentage = (expenses + profit – cash discounts) / (Sales + Reductions)

 

A helpful tool to determine price and markup is the 9 square box, which is illustrated below. This is good because it facilitates marketers decision making about how much to charge for their products or services. 

 

 

                                 $                        %

Cost                            

+ Markup 

= Retail Price

 

 

Here retail price = 100%. So if cost is 20$ and the retail price is 30$, cost would be 66.7% and mark-up would be 33.3%. Know the number and percentage is important. By knowing the percentage analysts can do average mark-up in and across product categories.

 

What else do you have to keep in mind for pricing?

·      What merchandise and products are you offering (what is the industry average of markups?)

·      Target Market

·      Policies

o   Supplier policies & reputation

o   In-house business policies

·      Markdowns + Shrinkage

·      Economic conditions

·      Competitors

o   Same prices

o   Above competitors prices

o   Below competitors prices

 

Pricing can become much more complex than this. There is yield pricing (think airline tickets), value pricing, and differentiated pricing, just to name a few. This is important for a business to think about, and the different prices with different strategies. Ultimately, pricing needs to fit into the overall strategy and story of a brand. Analysts need to dig deep and think about the core purpose and how each product aligns within the business objective and in relation to each other.

 

Now in Canada, the economy is going to be shaky. Imported products (even fruit) prices will increases 20-30%. Inflation is going to start to influence buyers purchasing decisions. How will this influence your price? How will you change your prices based on what geography you are in? 


Thanks for reading.


Light & Love

@Tara_Scanlan