November 15, 2005
Volume 1 Issue 36

PRICING TO COVER COSTS AND MORE

Business Objectives

Many businesses price their product or service to achieve an objective. Such objectives can include:

• Maximizing profits
• Sales growth
• Achieving a certain market share
• A targeted return for investment

In which case, prices will be set high or low to achieve the proposed objective.

There are three factors that influence pricing. These factors need to be analyzed as a group to make sure your pricing is maximized.

• Cost
• Customers
• Competition

COST:            

Unfortunately, most food distributors look at costs for their pricing without really understanding their full costs.  Cost consists of direct and indirect costs.  My belief is that we are not sure of indirect costs; therefore, our pricing does not generate sufficient margins to keep the business viable.  Indirect costs are all the costs incurred to run the business.  These costs should be added to the direct cost with the desired profit, so each product sold carries the load.  This contribution is the extra dollars added to the product cost to cover profit and indirect costs.  e.g. If you are running an indirect cost of  $0.10 per unit and you require $0.05 of profit per unit, you have a contribution of $0.15.  This needs to be added to your direct cost so you can drive the correct profit.  This is why knowing your true cost is so important.

CUSTOMERS:

We have to appreciate that customers value product themselves and if they feel they are not getting value for money, they simply do not buy. Likewise, if they feel a product is cheap, they do not buy it because they believe that the product has little quality. The extent to how you market your product can influence customer perceptions: if you market your product/service as quality, luxury, etc, customers will expect they have to pay more.

COMPETITION:        

Perhaps one of the most influential factors, competition can have a significant affect on pricing. Some businesses have the finance and image (branding) to eliminate competition with such pricing, but for those businesses that are trying to be eliminated: they find it very hard to respond using similar strategies and consequently go out of business by doing so.

Pricing is both science and art.  The science of pricing is knowing your true cost of doing business.  Make sure to put all costs into play when pricing, and don’t forget your profit.  The art of pricing is manipulating your pricing to fight competition, and still keep your customer satisfaction levels high.  Finally, remember to reflect all costs to your sales force, so they don’t negotiate your money instead of theirs.

INDIRECT COSTS CAN KILL PROFITS

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