The pricing policy you use in your business is an important factor when it comes to overall profitability. Selling goods at the highest possible profit margin does not necessarily generate the maximum profit. The maximum profit is the result of many factors including sales volume, product cost, operating costs and, of course, price.
In many cases a price increase will result in lowering the total number of sales, but this doesn't necessarily mean lower total profits. In some case profit may actually be increased if sales volume does not drop to drastically. The reverse is also true. Lowering the price of goods will often increase the total number of sales but if sales are not increased enough total profits may be less.
Knowing the cost per item of each product and your actual cost of doing business is of primary concern when developing your pricing policy. It may take some time to come up with the necessary information. Although you can't be expected to determine these numbers with complete exactness, it is important that your estimates be as close as possible to reality.
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.
Before setting the price on any of your products you must estimate the cost of labor, raw materials, variable overhead costs as well as research and development. As costs fluctuate over time you may need to re-evaluate these numbers to make sure they continue to be accurate.
Regardless of the strategy that is used to maximize profitability, the method for costing products is basic. It involves four main categories: Direct Material Costs, Direct Labor Costs, Overhead Expenses and Profit Desired.
The combination of these four factors will allow you to determine the minimum price you can charge for each unit. Additional information about these factors in provided in the resource described below.
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.
In many cases a price increase will result in lowering the total number of sales, but this doesn't necessarily mean lower total profits. In some case profit may actually be increased if sales volume does not drop to drastically. The reverse is also true. Lowering the price of goods will often increase the total number of sales but if sales are not increased enough total profits may be less.
Knowing the cost per item of each product and your actual cost of doing business is of primary concern when developing your pricing policy. It may take some time to come up with the necessary information. Although you can't be expected to determine these numbers with complete exactness, it is important that your estimates be as close as possible to reality.
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.
Before setting the price on any of your products you must estimate the cost of labor, raw materials, variable overhead costs as well as research and development. As costs fluctuate over time you may need to re-evaluate these numbers to make sure they continue to be accurate.
Regardless of the strategy that is used to maximize profitability, the method for costing products is basic. It involves four main categories: Direct Material Costs, Direct Labor Costs, Overhead Expenses and Profit Desired.
The combination of these four factors will allow you to determine the minimum price you can charge for each unit. Additional information about these factors in provided in the resource described below.
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 thorough explanation of how to develop your pricing approach including 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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