What is the role of prod­uct or ser­vice cost in the con­ver­sa­tion about price?  The truth is cost has lit­tle or noth­ing to do with sales price.  The mar­ket­place, that place of com­pe­ti­tion between buy­ers and sell­ers, sets price.  The price you can obtain for your prod­uct or ser­vice is based on per­ceived value. 

CEOs tend to start their con­ver­sa­tion about pric­ing with their account­ing depart­ment.  Truth be known the best start­ing place is your mar­ket­ing department.

Is it impor­tant to know your costs?  Absolute­ly.   But for rea­sons you may not imag­ine. You don’t need to know your cost to estab­lish sales price.  So why do you need to know cost?

  • To know if you are sell­ing below it
  • To sort thru your most and least prof­itable prod­ucts or ser­vices, there­by know­ing where you should focus your mar­ket­ing efforts
  • For the same rea­son you need to know any cost, to man­age it

So if you don’t deter­mine price from cost, how do you deter­mine price?  Based on what the mar­ket val­ues your prod­uct or ser­vice?  And how do you know that?  If you have the resources, you may be able to get this data from mar­ket research.  Guer­ril­la research on your com­pe­ti­tion is a great start­ing place.   Trade asso­ci­a­tions are also good resources for price as are key ven­dors.  Think of whom you know who under­stands your mar­ket place.  Of those peo­ple, who can you call on that will help you in your quest?  There­after, tri­al and error can prove very valu­able. If you aren’t get­ting any no’s, then it is like­ly your price is too low. 

how do i pricePrice is one of the fac­tors that helps peo­ple choose your prod­uct or ser­vice. Low price engen­ders feel­ings of low qual­i­ty and low val­ue.  High price, like­wise high qual­i­ty and high val­ue.  When eval­u­at­ing your pric­ing, know where you want your ser­vice or prod­uct to be per­ceived on the qual­i­ty and val­ue spectrum.

Anoth­er great ques­tion to explore is how large is the mar­ket­place at a giv­en price point?  You may be able to get a very high price for your prod­uct or ser­vice, but find only a hand­ful of buy­ers.  At what price are there suf­fi­cient quan­ti­ties of buy­ers to build a mar­ket­place around?

How­ev­er you choose to set pric­ing, use trend­ing analy­sis to track your results.  Trail­ing 12 months charts of sales and gross mar­gin with nota­tions about sig­nif­i­cant changes are crit­i­cal in know­ing if a change in pric­ing strat­e­gy is effec­tive.   Too often as CEO’s we get all too focused on the top line and for­get, it is all about the mar­gin.  Be sure you are watch­ing both, in tan­dem with each other.