Understanding Pricing

It’s important to understand how to price a product or service because if you don’t, you might make a lot of sales but lose money on every sale.

For example, if product A costs $10 to produce, some might think selling for anything more than $10 will result in a profit. However, there are other costs that have to be taken into consideration.

Is the amount of research that was done to create the product factored into the cost? If it cost $100,000 in R and D to create this product, those costs must be factored into the actual cost of production
Is the amount of marketing being factored into the costs? This is not only direct advertising costs but also the time spent designing the campaigns.
Are the administrative costs being factored into the cost? This could be everything from order takers, managers, secretaries, office space, supplies etc.
Is the opportunity cost being factored into the cost? This would be the lost opportunities because you devoted your resources (money, time etc) to one project and not another. For example, if you can sell this $10 product for $12, you might see it as a profit of $2 but those same resources might have been able to bring in $20 doing something different. So, while some might see this as a profit of $2, others might see it as a loss of $8

While there are other factors to take into consideration these four factors are a good place to start.

A manager of a retail store once jokingly told me that they lost money on every sale but made it up in volume. I think he was kidding…but the chain is out of business.

Have a great day!

Lawrence

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