A critical factor in any business is developing an effective pricing policy that will maximize profits. Maximum profit does not necessarily result from selling goods at the highest possible profit margins. There is a relationship between the price, volume sold, cost of merchandise, and operational expenses that ultimately determines profitability.
For instance, price increases may result in fewer sales and yet still yield a higher overall profit for the business. In other cases this approach may result in decreased profits. On the other hand, reductions in prices that result in sales volume that is substantially increased may produce an improvement in profits.
When it comes to making a pricing determination, the first factor you need to know is the cost of doing business as well as the product's cost per unit. This may require some detailed research and analysis to come up with some accurate estimates. You will not be able to determine these numbers with 100% accuracy, but it should be as close as possible.
Failing to accurately estimate the actual costs closely enough so that you can make sure your price is high enough to cover them is often the cause of a business failing. This is because many business owners underestimate the overall cost and without knowing it, they end up selling their products at a loss.
You will need to determine the approximate cost of product research and development, indirect overhead expense, raw materials and labor before setting the final price of each item. Since costs may change over time you should update these numbers regularly.
The method for costing products is basic regardless of the sales and pricing strategy that is used to maximize profits. The four main categories to be accounted for are Labor Expense Per Unit, Cost of Materials Per Unit, Estimated Overhead Per Unit and Desired Profit Per Unit.
You can determine an items minimum acceptable price by combining these four factors. For a more thorough explanation of these factors visit the resource listed at the end of this article.
Of course, pricing your product to achieve some level of profit is only one of the factors that needs to be considered in a business plan. Once you have figured out your costs, your break even point and your minimum profit requirements you will also want to consider your sales strategy. To succeed in a competitive market most businesses use three major sales strategies (sometimes all at the same time).
As you can see there are many factors to consider when determining a products final price. Although many businesses try to compete on price alone there are many others that compete on value by offering a more effective product or by finding a niche in the market that is being under-served or not served at all. Regardless of your market approach, it is essential that you analyze and understand all the factors relating to your product pricing.
For instance, price increases may result in fewer sales and yet still yield a higher overall profit for the business. In other cases this approach may result in decreased profits. On the other hand, reductions in prices that result in sales volume that is substantially increased may produce an improvement in profits.
When it comes to making a pricing determination, the first factor you need to know is the cost of doing business as well as the product's cost per unit. This may require some detailed research and analysis to come up with some accurate estimates. You will not be able to determine these numbers with 100% accuracy, but it should be as close as possible.
Failing to accurately estimate the actual costs closely enough so that you can make sure your price is high enough to cover them is often the cause of a business failing. This is because many business owners underestimate the overall cost and without knowing it, they end up selling their products at a loss.
You will need to determine the approximate cost of product research and development, indirect overhead expense, raw materials and labor before setting the final price of each item. Since costs may change over time you should update these numbers regularly.
The method for costing products is basic regardless of the sales and pricing strategy that is used to maximize profits. The four main categories to be accounted for are Labor Expense Per Unit, Cost of Materials Per Unit, Estimated Overhead Per Unit and Desired Profit Per Unit.
You can determine an items minimum acceptable price by combining these four factors. For a more thorough explanation of these factors visit the resource listed at the end of this article.
Of course, pricing your product to achieve some level of profit is only one of the factors that needs to be considered in a business plan. Once you have figured out your costs, your break even point and your minimum profit requirements you will also want to consider your sales strategy. To succeed in a competitive market most businesses use three major sales strategies (sometimes all at the same time).
As you can see there are many factors to consider when determining a products final price. Although many businesses try to compete on price alone there are many others that compete on value by offering a more effective product or by finding a niche in the market that is being under-served or not served at all. Regardless of your market approach, it is essential that you analyze and understand all the factors relating to your product pricing.
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For a more complete explanation of how to develop your pricing approach along with examples and the three main sales approaches most businesses use to develop the most profitable pricing strategy visit the Business Resources Site.
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