All businesses at various times deal with issues relating to the cost they accrue for acquiring raw material and determining prices which they will charge customers for goods and services.

Costing

Cost is a necessary part of running a business, raw materials have to be bought, rent has to be paid and of course whatever expenses are incurred in the starting and running of your business. To determine your price you first have to determine your business objectives and your costs. You will probably finally price your products based on your own costs, your competitors’ prices or the demand for your product.

Know your costs

Determining your cost will aid you in determining your price; if you are operating a really small business then this will be easier for you to do.

Distinguishing costs

Fixed costs

These are costs that are not dependent on your usage, for example, your rent is a fixed cost, it will not change if you produce more or less for the month.

Variable costs

These are costs that vary depending on usage, examples are your electricity and water charges.

Direct costs

Costs that are directly linked to the production of goods or services, for example if you are operating a restaurant where you sell vegan burgers, then a direct costs would be the cost of your burger ingredients and the seasoning and spices you use to make it tasty.

Overhead costs

These are costs that can be directly linked to the production of goods or services but is not specifically linked to any one product, for example, the air conditioning unit in a restaurant.

Pricing

You can choose your pricing with the intent of satisfying a number of goals:

Demand

You can price your goods based on the expected demand for your goods or services. You have to look at the price the market is willing to pay. Therefore you could charge more for your product if the market is willing to pay more. If your potential customers see your product as a ‘premium product’ then they will be willing to pay more for it because they view it as quality above the ordinary.

Competitors

You can decide your price based on what your competitors are charging. You may choose to go above, below or charge the same. If you decide to go above your competitors make sure you are marketing a product that is in some way superior to theirs’, whether you are offering better after sales or customer service. Whatever it is, you don’t want to price yourself out of the market.

Costs

You can determine your costs and add a mark-up to that cost to get your price. Try to at least break-even or else you will find yourself in trouble pretty quickly.

When determining prices try to be realistic, don’t set prices too high or two low. Remember the information you would have acquired and analysed from your market research is to help you determine where you stand in the market, so think through that when you decide your price. Consider offering different packages to suit the needs of different markets. You may even decide to charge your high-end clients a different price compared to what you offer your low-end clients.

Here are some pricing strategies to consider:

Competitor pricing

Set your price based on what competitors are charging.

Cost-plus pricing

Set your price by adding a percentage to cost. Find out how to calculate cost plus price.

Penetration pricing

Here you set the initial or introductory price lower than the current market price to gain many sales and lure customers. The price can then be increased when the product becomes more popular.

Price discrimination

Here you set different prices to different markets for the same product.

Predatory pricing

Setting a very low price with the intent of getting rid of the competition. You continue to drop the price until your competitors are out of the market.