Pricing is one of the most important decisions you can make for your business. The amount you charge for your goods or services will, in large part, determine what your revenues will be.

There is more to pricing than simply deciding how much you want to charge per unit sold. Pricing is part of your marketing strategy; it's a statement about your product's strengths and weaknesses, and a means of inventory control.

Pricing factors

No matter what business you're in, there are three factors to consider before deciding what to charge for your products or services: costs, competition, and customers.

Your costs

Operating a business involves expenses. Your costs may include:

The price you charge for your product or service must cover your costs if your business is to survive.

There are two types of costs:

Your breakeven price is the total cost of your product — fixed cost + variable cost — expressed as a cost per unit. If you charge anything less than the breakeven price, you will lose money.

The difference between what you pay per unit and the price you charge is called the margin.

If you think your profits are the most important factor in determining your price, your baseline price should be the total cost + the desired margin.

Your competition

The price your competition charges for similar products or services can give you an idea of what price to set for your own.

Price benchmarking helps you understand where you are positioned relative to your competition. If you want customers to choose your product, you'll need to come up with a pricing strategy, and decide if you will charge the same price, a lower amount, or a higher amount, in order to maximize your sales potential.

Your customers

Savvy customers know the price they expect to see and what they are willing to pay. Different customers have different expectations. The bargain hunter wants the lowest price available; the lifestyle shopper expects to pay a premium. The price you set helps determine the customer you will get.

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