Pricing Techniques

Pricing Techniques

 The importance of pricing  cannot be underestimated as incorrect pricing can often result in the failure of a business. New businesses often make the mistake of either charging too little or too much for their product or service. So to help you avoid making one of these mistakes, the following section will outline some of the guiding principles of pricing techniques.

 Price is a key part of marketing. Setting prices is called pricing.

 Setting Prices

 Prices for products and services can be set by pricing to the market, pricing to your costs, and rule of thumb pricing. New business people with little experience may set an initial price based on the market, and then as experience grows, re-set prices according to costs. These two aspects of price–what is acceptable to the market, and what costs are–must both be considered.   In addition, effective pricing depends on the business goals of your company: do you want to maximize profits or are you aiming for high growth in sales?  The choices that a business ultimately makes about its markets and sales make a big difference in pricing.


For example, a business may make an early choice about where to position themselves in  the market–the “good value,” low end of the market, or the “quality conscious,” upscale market. In pricing, as in everything else in business, the customer is the reference point.

 Pricing to the Market

 Compare prices with your competitors for similar products and services.  Set the price range that customers will expect. You can use that market price range–what is acceptable to the market–as a guide to set your prices. Businesses or people to whom you sell may also price to the market by telling you what they will pay for your product or service. As you keep records of actual costs, the cost approach to pricing will help you make sure all your costs are covered, which may not be true in a market approach to pricing.

 NOTE: Be careful about underpricing in order to compete or make sales. Use competitor’s prices to establish the price range for similar products or services but don’t underprice; if your true costs are higher, your final prices will have to be higher.

 Cost Approach to Pricing

Price must cover all costs of goods/services sold, including production costs of supplies, materials, fixed overhead, and time/labor, plus a profit. Costs should include costs of production, labour and non-labour, including overhead or fixed costs as well as supplies and materials.

 Use this simple formula in setting a price (per unit):

 Total Costs of Production Per Unit + Desired Dollar Profit Per Unit

 Businesses can set different profit rates, for example 15% profit on supplies and materials, 20% profit on labor/time, and 25% profit on overhead. These more complicated approaches to pricing usually emerge in response to the special needs of a particular business.

 If your research reveals that similar products or services are available on the market at a cost  much lower than what you could offer, you may have to either adjust your profit margin, the return you expect, or decide to provide enough specialized service or selection that the market will pay the extra.  Alternatively, you may be forced to conclude that you cannot afford to make this item or provide this service and look for something else to do.

 NOTE: Remember to cost materials at the level it costs to replace them – NOT at original prices; include salaries as a business expense; include interest in your business cost calculations — interest that could have been accrued had the money used in the company been invested elsewhere (i.e. a bank); make allowances for future refunds, servicing, bad debts, amortization of capital costs of equipment or machinery.

 “Rules of Thumb” in Setting Prices

 Some types of businesses charge prices according to certain “rules of thumb”: For example:  price is always twice labor plus materials, or twice materials plus labor depending on which is higher;  price is always materials and  labor plus 20% for fixed costs, plus 25% for profits.

Calculating actual costs is the only proven way to make sure your prices cover your costs.  Labor/time charges are to be covered partly in the costs of production and partly as a salary in the fixed/operating or overhead costs. In summary, key points to consider in setting prices are:

  •  marketing strategy and your immediate goals
  •  competitors’ prices, and the market
  • market demand for the product and consumer buying trends
  •  need to cover costs and provide an adequate profit.



Much of your success in business will depend on how you price your goods and services. If your prices are too low, you will not cover expenses; too high and you will lose sales volume. In both cases, you will not make a profit.


Before opening your business you must decide upon the general price level you expect to maintain. Will you cater to people buying in the high, medium, or low price range? Your choice of location, appearance of your establishment, quality of goods handled, and services to be offered will all depend on the customers you hope to attract, and so will your prices.


After establishing this general price level, you are ready to price individual items. In general, the price of an item must cover the cost of the item, all other costs, plus a profit. Thus, you will have to markup the item by a certain amount to cover costs and earn a profit. In a business that sells few items, total costs can easily be allocated to each item and a markup quickly determined. With a variety of items, allocating costs and determining markup may require an accountant. In retail operations, goods are often marked up by 50 to 100 percent or more just to earn a 5% to 10% profit!


Let us work through a markup example. Suppose your company sells one product, Product A. The supplier sells Product A to you for $5.00 each. You and your accountant determine the costs entailed in selling Product A are $4.00 per item, and you want a $1 per item profit. What is your markup? Well, the selling price is: $5 plus $4 plus $1 or $10; the markup therefore is $5. As a percentage, it is 100% ($5 markup = $5 cost of the item). So you have to markup Product A by 100% to make a 10% profit!


Many small firms are interested in knowing what industry markup norms are for various products. Wholesalers, distributors, trade associations and business research companies publish a huge variety of such ratios and business statistics. They are useful as guidelines. Another ratio (in addition to the markup percentage) important to small firms is the Gross Margin Percentage (GMP).


The GMP is similar to your markup percentage but whereas markup refers to the percent above the cost to you of each item that you must set the selling price in order to cover all other costs and earn profits, the GMP shows the relationship between sales revenues minus the cost of the item, which is your gross margin, and your sales revenues. What the GMP is telling you is that your markup bears a certain relationship to your sales revenues. The markup percentage and the GMP are essentially the same formula, with the markup referring to individual item pricing and GMP referring to the item prices times the number of items sold (volume).


Perhaps an example will clarify the point. Your firm sells Product Z. It costs you $.70 each and you decide to sell it for $1 each to cover costs and profit. Your markup is 43%. Now let up say you sold 10,000 Product Z’s Iast month thus producing $10,000 in revenues. Your cost to purchase Product Z was $7000; your gross margin was $3,000 (revenues minus cost of goods sold). This is also your gross markup for the month’s volume. Your GMP would be 30% . Both of these percentages use the same basic numbers, differing only in division. Both are used to establish a pricing system. And both are published and can be used as guidelines for small firms starting out. Often managers determine what Gross Margin Percentage they will need to earn a profit and simply go to a published Markup Table to find the percentage markup that correlates with that margin requirement.


While this discussion of pricing may appear, in some respects, to be directed only to the pricing of retail merchandise it can be applied to other types of businesses as well. For services the markup must cover selling and administrative costs in addition to the direct cost of performing a particular service. If you are manufacturing a product, the costs of direct labor, materials and supplies, parts purchased from other concerns, special tools and equipment, plant overhead, selling and administrative expenses must be carefully estimated. To compute a cost per unit requires an estimate of the number of units you plan to produce. Before your factory becomes too large it would be wise to consult an accountant about a cost accounting system.


Not all items are marked up by the average markup. Luxury articles will take more, staples less. For instance, increased sales volume from a lower-than-average markup on a certain item – a “loss leader” – may bring a higher gross profit unless the price is lowered too much. Then the resulting increase in sales will not raise the total gross profit enough to compensate for the low price.


Sometimes you may wish to sell a certain item or service at a lower markup in order to increase store traffic with the hope of increasing sales of regularly priced merchandise or generating a large number of new service contracts. Competitors’ prices will also govern your prices. You cannot sell a product if your competitor is greatly underselling you. These and other reasons may cause you to vary your markup among items and services. There is no magic formula that will work on every product or every service all of the time. But you should keep in mind the overall average markup which you need to make a profit.


Skillful buying is an important essential of profitable operation. This is true whether you are a wholesaler or retailer of merchandise, a manufacturer or a service business operator. Some retailers say it is the most important single factor. Merchandise, which is carefully purchased, is easy to sell. Buying is using the firms scarce resources and thus should recieve the hightest attention of management.


Determining what to buy means finding out the type, kind, quality, brand, size, color, style -whatever applies to your particular inventory – which will sell the best. This requires close attention to salespeople, trade journals, catalogs, and especially the likes and dislikes of your regular customers. Analyze your sales records. Even the manufacturer should view the problem through the eyes of customers before deciding what materials, parts, and supplies to purchase.


Know your regular customers, and make a good evaluation of the people you hope will become your customers. In what socioeconomic category are they? Are they homeowners or renters? Are they looking for price, style or quality? What is the predominant age category?


The age of your customers can be a prime consideration in establishing a purchasing pattern. Young people buy more frequently than most older people. They need more, have fewer responsibilities, and spend more on themselves. They are more conscious of style trends whether in wearing apparel, cars or electronic equipment. If you decide to cater to the young trade because they seem dominant in your area, your buying pattern will be completely different than if the more conservative middle-aged customers appear to be in the majority.


Study trade journals, newspaper advertisements, catalogs, window displays of businesses similar to yours. Ask advice of salespeople offering you merchandise, but buy sparingly from several suppliers rather than one, testing the water, so to speak, until you know what your best lines will be. You should se the internet to find information as well as suppliers. Don’t forget that special cable shows as internet sites can help you determine trends.


Locating suitable merchandise sources is not easy. You may buy directly from manufacturers or producers, from wholesalers, distributors or jobbers. Select the suppliers who sell what you need and can deliver it when you need it. Most business people for quick fill-ins between factory shipments use (Distributors and jobbers.)


You may spread purchases among many suppliers to gain more favorable prices and promotional material. Or you may concentrate your purchases among a small number of suppliers to simplify your credit problems. This will also help you become known as the seller of a certain brand or line of merchandise, and to maintain a fixed standard in your products, if you are buying materials for manufacturing purposes.


When to buy is important if your business will have seasonal variations in sales volume. More stock will be needed prior to the seasonal upturn in sales volume. As sales decline, less merchandise is needed. This means purchases of goods for resale and materials for processing should vary accordingly.


At the outset, how much to buy is speculative. The best policy is to be frugal until you have had enough experience to judge your needs. On the other hand, you cannot sell merchandise if you do not have it.


To help solve buying problems, you should begin to keep stock control records at once. This will help you keep the stock in balance – neither too large nor too small – with a proper proportion and adequate assortment of products, sizes, colors, styles and qualities.


Fundamentally, there are two types of stock control – control in dollars and control in physical units. Dollar controls show the amount of money invested in each merchandise category. Unit controls indicate the number of individual items when and from whom purchased by category. A good stock control system can help you determine what, from whom, when, and how much to buy.

Challenge No. 9: Knowing How to Compete – Part B

Product Benefits and Customer Needs -Keys To The Marketing Paradigm

 (This is a lecture from a University MBA Class I instructed. It more clearly defines a paradigm for competing.)

A major difference between physical and social sciences is that physical sciences tend to have “hard” fact basic fundamentals. Take string theory in physics – once you get to a string, that’s the end of the line. Most social sciences deal with the uncertainty of human interaction. Yet marketing has a basic element that is almost as elemental as the string in physics.

 The “Holy Grail” of marketing is called a need. Needs are internal human drives that force humans to seek specific “things” to reduce the force of the drive. All services and products have elements called benefits that are the key to satisfying needs. Marketing is the science and art of matching benefits to target market needs.

 The matching of benefits to needs is the primary function of any business. Until recently marketing was often thought of as a division or function within a firm. Many firms are now considered marketing driven firms. The recognized leading scholars in the marketing discipline now consider that the sole reason for the existence of a free market firm or organization is deliver goods and services whose benefits match the need of the market place. Understand that this implies that all resources of an organization/firm are committed to this action.          

 What is a need? Perhaps one of the best needs models is that of Abraham Maslow. Maslow developed a model known as the “hierarchy of needs”. There are many other needs models, but Maslow’s model has stood the test of time in social science literature. It has as it’s basis five different level of needs.

 These five levels of needs are: physiological needs, safety needs, social needs, esteem needs, and self-actualization needs. You might find it useful to look up Maslow on the net and become more familiar with this theory if you have not been exposed to it. This is another good model to keep handy and ask yourself “my products most important benefit satisfies what need level”.

 Marketing has developed significant tools to discriminate product benefits. These are used a predictive models for market acceptance. What does it mean to match a benefit to a need? It means that some form of communication from the organization seeking to deliver a good or service convinces the intend target market that the product/service will indeed satisfy the markets need.

 Some benefits of particular products are so strongly related to needs that little “marketing” communication is needed. Gasoline for your car. Milk, bread, and toilet paper at the super market. Insulin for diabetics and antivenin for snake bite victims. Some of these items are commodities – meaning that price is often the key selling point. Some are specialty items that are so import that quality is more important than price, but the price/value ratio can also be important in these products.

 Marketing communications are often highly visible elements in the marketing mix of a firm. Yet there are other marketing elements such as product quality and channels of distribution that can change the markets perception of how well the product’s benefits meets it’s needs.

 The marketing paradigm as presented in the text is a useful pedagogical tool for understanding the different elements of marketing and how they interrelate. As with any tool an understanding of that tool and how best to use it is critical to how valuable a tool is in one’s professional skill set. It is important that in each section of the text you ask yourself – how does this section facilitate the matching of product/service benefits with the target markets needs.

 The following two examples are of how assessments of product benefits allowed for a matching with target market needs that resulted in significant increase in product sales.

             The Camera Retailer Big Print – Consumer Marketing Benefits to Needs

 In the late 1970’s computerization allowed high quality, low cost autofocus cameras to enter the market. More people began to shoot 35mm film which has far superior color rendition and sharpness compared to the 126 and 110 formats. This presented a market opportunity for the specialty camera shops.

 Most of the new cameras were sold (at first) in camera specialty shops. Normally these shops are small shops (some are chain stores others are “Ma & Pa” stores) located both in malls and in smaller standalone buildings. Customers who normally use photo specialty stores have a higher expectation of quality. This expectation is a need and the quality control exercised by the specialty store photo finishing is the product benefit that meets that need.

 The one-hour labs had yet to gain a significant amount of market share. The traditional photo processing labs consisted of three types. High volume, low quality processing plants that serviced the price sensitive markets represented by firms like Fred Myer and the various drug chains. The national (and at that time international) photo processing leader who focused on quality was Kodak.

 Specialty camera shops often bought photo finishing from the high volume labs and had a private brand with somewhat more quality control than offered by the discounters. Most camera specialty stores offered Kodak processing that cost more and took a substantially longer time to be returned than the other two processing options..

 At this time, the standard picture size was 3.5″ x 5″.  Pictures were in fact a commodity with only quality (which is very subjective when it comes to processing) and delivery time, a key product benefits.

 One of the manufacturers developed an automated processing machine that could produce a new size of print – the 4″ x 6″ print. The 5 x 7 was the most popular enlargement at this time. It cost substantially more than the little 3.5 x 5 prints. Bigger pictures display better, older people with less than perfect eyesight find them fitting their needs betters.

 This new size represented a significant opportunity to present a new benefit to this particular target market. 4 x 6″ prints are 37% larger that the smaller size. The machines that produced this new size print were comparably priced with the older machines. Fuji was aggressively moving into the photo process supply market as was Agfa. Both produced a 4″ wide roll that was priced to compete with the smaller roll.

 The price of this new benefit was zero to the consumer. Photo processing is one of the most profitable items sold in a camera specialty store. We had over 75 stores at the time that could be service by our own processing plant ( which we opened to take advantage of the new size and it cost advantages).

 We developed a program of consumer advertising in electronic and print media that focused on what we felt were the two key benefits. Benefit one – the customer was now receiving a print that was 37% larger than the industry standard at no extra cost. We had a new state of the art plant that produced Camera Retailer Big Print – with guaranteed color – Love Em or Leave Em! Benefit two – a no risk purchase decision.

 We knew our product well enough to know the key benefits. We recognized a competitive new product that had an added benefit to our target market. We developed a marketing strategy that highlighted how the larger size and guaranteed quality could satisfy the needs of the customer.

 The chain expanded to over 300 stores when I was there. A significant portion of that growth was funded by the explosive growth of the large standard print. When one hour processing machines were developed, we became the distributor for the first 4″ x 6″ machines and had them in over 175 stores in the first year as the distributor.

 The Shuttle Transportation Market – The Industrial Customer Benefits and Needs

 Oregon is a state that is growing rapidly. The high tech industry in the Portland area is stressing the infrastructure. Roads are experiencing capacity problems. The state has had a revolt of the tax payer and new taxes and levies are defeated routinely.

 Public transportation systems are not chartered to help firms solve their transportation problems. The state and federal government regulate the safety issues of people moving transportation systems by inspections whose result can brings fines and/or revoking a firms operating authority if safety standards are not meet.

By a combination of relationship selling and market evaluation, we felt that this was a market that would provide Bus Company, who was at that time a very seasonal firm, with a year round income base.

 Industrial sales involves several sets of customers. Those who ride the shuttle are customers. The purchasing agent is a customer. The firm is a customer. Each of these customers have different needs, but paramount is the need to feel the transportation system is safe. The purchasing agent and the firm need to reduce risk that the system will fail causing the firm not to fulfill it’s mission.

 Can one product have a different set of benefits to different customers? Can one product have a set of benefits that are perceived by different targets markets as solving different needs? Yes, a product or service can be perceived by different customers as meeting vary different needs. Passengers want the system to be safe and run on time. The purchasing agent wants a price/value purchase as well as reliability that reduces the risk to him/her of losing their job if the system does not meet the needs of the firm and riders. The firm may need a system that is never seen as a traffic problem or is seen as an effort by the firm to reduce it’s impact on the community.

 We developed and continuously revise our shuttle proposal program. Our sales staff evaluates the specific needs of all customers sets involved in a shuttle. From that field intelligence we develop a profile of the benefits of our program that address the expressed and implied needs of the customer.

 Knowing one’s product/service benefits is extremely critical in developing the message you send to the customer to provide evidence that your products fulfill their needs. Other key benefits of a shuttle system which are not apparent to most customers include the management of the rules and regulations of the overseeing government agencies, the redundancy of equipment and drivers needed in such a system.

 Many industrial purchasing agents often are required to purchase items that they do not understand. Benefits must be presented in a format that explains how they satisfy the needs of the industrial buyer. Most industrial buyers have a high risk aversion factor. A careful presentation of benefits in a positive manner will often get the same risk reduction message across that a negative reference does. The difference being that in being positive you have helped convince the purchasing agent that you program is designed from the start to reduce risk – one of the key needs of all industrial buyers.

 The model that we have developed now represents more than 50 firms – from large to international giants. We have cataloged how the various buyers present the needs of the firm, themselves and the end users of the products. We utilized this feedback to refine our models for specific industries, although the two key major benefits of risk reduction and safety remain key elements of each sales presentation.

 Product benefits are often very hard to identify. Many firms have made the mistake of promoting product features as benefits. At most, product features lead one to discover the product’s benefits. A digital tuner for a radio is a feature – the ability to program stations which then can be found with the press of a button is a benefit. Specifically, the benefit is the ability to find your favorite station without turning a dial and listening to each station until you find the one you want.

 Product/service benefits are key to fulfilling the needs of target markets. In every case study you read, in every model or theory you study, the student of marketing needs to ask, does it help identify a need (or action that represents a need) or does it help define benefits.

Challenge No. 9: Knowing How to Compete

“My best advice for competing successfully is to find your own distinctive niche in the marketplace. It could be price, or variety, or service . . . whatever it is, stick to it.”


To keep customers and add new ones, owners stress the value of knowing how to compete. They have learned through experience that there is a difference between “just plain competing” – for example, relying on low prices – and knowing how to compete effectively. Owners believe that competitive savvy means being true to what made them successful in the first place – keeping the integrity of their original vision, growing strategically, and above all, using their strengths as leverage in the marketplace. All this is achieved while keeping an ever-vigilant eye on what the “other guys” are doing.


Again and again, owners stress the value of adhering to their original plan. “My goal is to make my business profitable without compromising our values,” stated one toy retailer.


To achieve his goal, the retailer concentrates on his distinctive niche. “People come to us because they like our personal service,” he explained, “but sometimes they only have so much money to spend. We have overcome this by becoming more of a specialty store.”


Owners sometimes struggle to uphold their commitment in the face of stiff competition – but they find that maintaining the integrity of their idea and focusing on their strengths are the best long-term competitive strategy:


“I’ve seen our industry going through price-cutting that is absolutely staggering,” noted a construction equipment lessor, “but I have not participated in it. Yet I have grown and prospered and make a nice profit, and we are consistently the highest-priced people in the marketplace. In the long run our quality shows our customers that we are the cheapest to do business with. You spend an awful lot of agonizing evenings and days trying to decide whether to participate in the price-cutting game – do you try to just gain market share and kill the competitors? If you have a quality product, you probably will kill your business at the same time. It takes guts and commitment to withstand that, to rally your sales staff around you and say, ‘we are not the cheapest, but we are going to be the best.'”


To keep capitalizing on their strengths while sales increase, most owners set a goal for controlled growth.


“You can grow too fast,” noted a contractor. “You don’t want to take on more projects that you can complete. And, you don’t want to take on more than you can finance.”


How do owners expand their customer base? Most rely on a variety of methods. Eventually, they develop a mix of keeping their sales staff motivated and marketing effectively.


“You learn better sales and motivational techniques,” said one wholesaler. “Make sure your people continue to learn new ways of selling.” Effective marketing involves communicating the benefits of your product or service to obtain new customers. Owners rely on a variety of methods, usually tailored to what works best for their particular business.


“Word of mouth is big,” said one retailer. “We live in a community that is pretty good about passing on the good word.” This owner also used advertising and the yellow pages to keep his name out in front of the market. In general, he advised to “find what works and stay with that.” Those who could afford it found value in tapping the expertise of outside marketing consultants.


Of course, effective marketing inevitably includes being aware of your competitors’ activities. “You have to be very cognitive of the competition and what they’re doing,” noted an automotive glass replacement shop owner. A businesswoman explained that “knowing where you stand relative to your competition allows you to position your own product in relation to the market” – referring back to the theme of knowing where your strengths are and capitalizing on them.


It is at this point that pricing does become an issue for small business owners. Inherent in the concept of small business is that you cannot discount on low volume – so to make a profit while being price-competitive, owners advise that you establish an identity, stick to it, and communicate it.


“What do you give your customers that your competitors do not,” asked one successful owner, “and what is that extra something worth to your customers? That’s the whole concept of value-added services, and that’s how you establish your prices.”


“To get higher prices,” advised another entrepreneur, “do something different that no one else is doing.”


Challenge No. 8: Satisfying Customers by Providing High Quality

First and foremost, recommend owners, commit yourself to providing quality. This establishes and maintains credibility with your customers.

“You must be willing to commit yourself to supplying the absolute best product of the industry you go into. Not being an also-ran but telling yourself, ‘I am going to throw a touchdown every time I open the doors in the morning.'”

Deliver the best possible product or service and do everything you can to ensure that your customers are satisfied. This is the creed by which small business owners everywhere live. Upholding it is a constant challenge.

Another business owner put it in direct terms: “Your customers are going to dictate whether or not you are going to succeed. If you don’t please them and if you don’t listen to them, you won’t succeed.”

“My theory in business,” explained one owner, “is if I do a good job for you, I hope you tell one or two of your friends. If I do a lousy job for you, you’re going to tell everyone you see. Never forget that you have competition.”

It’s important to build and develop credibility because it builds your business. Yet, as one owner stated, “Growth and reputation are the hardest things to come by.”

The owner of an interstate trucking company explained that “the one common thread through every type of business is people. It’s still a people’s business. You’d better have credibility. You’d better have the talent to do what you’re supposed to do, first of all, but that’s only just a part of it. Get credibility and maintain that credibility. Know that the people you’re servicing are going to say good things about you to other people – because that’s how you’re going to build your business.”

This commitment to quality is indeed vital. Just look at how seriously small business owners take it: “Make sure your quality of work is still top-notch and has been from start-up. Make sure you haven’t slid or suffered, that your name and your recognized quality are still there,” advised one.

Customers are the foundation of your business. Thus, it is absolutely essential to do everything possible to please them. Often, initiating dialogues with customers can be of enormous value in helping to provide better service. “We wanted to evaluate the reputation of the company we purchased,” explained a printer, “so we went directly to clients to find out exactly what they thought about it.”

“The response was tremendous,” he continued. “They’d never had someone who really cared enough about their business to ask them how they wanted the products produced for them. That feedback on a direct basis with my other partners was invaluable. It turned things around for us.”

Small business owners find that quality is still the best way to please customers. “Make that product better than anybody else can,” advised an owner. “Do the best job that you possibly can.”

As a business grows, it’s important to maintain quality – but when sales begin to increase, it can be a major challenge to keep the original commitment to the quality and benefits of your product. Thus, most businesses set a goal for controlled growth.

“Whatever credibility you may have built up on your reputation or your performance suffers if you’ve got more work than you can handle,” offered an owner. “You can’t properly perform it. You can’t properly manage it. Your work starts getting shoddy. That will destroy quite a bit of effort you’ve put into getting there.”

Sometimes satisfying customer requires taking extraordinary measures, but owners believe it’s the best way to maintain their reputation and protect their business.