Pricing Your Product or Service Right

Business Proverbs
by Steve Marr

A convenience store was raising the price on a single can of pop from $1.09 to $1.19 each, while one block away another retailer was holding the line at $.99 each. One pizza shop continued to offer free delivery, while other competitors had instituted a $1.00 to $1.50 charge per order. Establishing the best pricing strategy is always challenging, but considering a few guidelines may help.

First, know your customers well. King Solomon wrote, "Know well the condition of your flocks and pay attention to your herds" (Proverbs 27:23 NASB), ). In business, your customers are your flock. A gas station with that thrives on repeat customers may want to keep the prices lower on products like candy and pop to encourage more stops for gas. Increasing sales of those extra items will increase revenue and build up and the bottom line. A station that caters to mostly transient customers may not lose business by charging a few extra cents on a product - in return for convenience the higher prices may bring in extra dollars without affecting volume.

Matching a competitor's prices is wise only when there is little difference to the customer in location, quality, or service. Starbucks coffee offers specialty coffees and lattes but at a higher price than coffee from, say, McDonalds. If Starbucks were to try to match pricesing with McDonalds, the result would be little gain in business but a large loss in revenue. Customers are willing to pay more when they perceive that they are receiving something of more value. In the gasoline business, price and location are the key factors. Likewise, a gas station, regardless of appearance, will attract few customers if their price is a nickel higher than the place across the street.

Many retailers use a standard markup approach to setting prices, adding the same percentage to every item. Although this standard markup is an easy approach, it often fails to yield the best results. Consider keeping prices lower on items that customers buy regularly, and raise the price on products that are likely to be an impulse buy. You will keep your volume moving with sharp pricing on the faster-moving products, but also increase your profit margin on slower moving merchandise.

A person had a business of cleaning oriental rugs and charged by the square foot cleaned. Pickup and delivery was included in the price. The owner soon discovered that he was losing money on jobs with only one or two rugs. In response, he adopted a two-part pricing strategy. First, he added a delivery charge for smaller orders to offset his cost of providing the service. Second, he offered a discount to customers who sent in four or more rugs. As a result, smaller orders became profitable while customers with more rugs were given an incentive to provide more business.

Working through a well crafted pricing strategy will help you maximize your business potential.

Steve Marr is a business/ministry consultant and author of the book Business Proverbs. His daily radio feature, "Business Proverbs" is heard on 1,000 radio stations. He is the former CEO of the fourth largest import-export firm in the United States. Website: www.businessproverbs.com

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