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COMPETITIVE PRICING INTELLIGENCE
Click on the thesaurus category heading under the button in an entry to see the synonyms and related words for that meaning. Change your default dictionary to British English. Show more. Show less. Using the thesaurus. Close What are red words? Close Thesaurus. Though pricing strategies can be complex, the basic rules of pricing are straightforward:. Before setting a price for your product, you have to know the costs of running your business. If the price for your product or service doesn't cover costs, your cash flow will be cumulatively negative, you'll exhaust your financial resources, and your business will ultimately fail.
Don't forget to add the costs of markdowns, shortages, damaged merchandise, employee discounts, cost of goods sold, and desired profits to your list of operating expenses.
Most important is to add profit in your calculation of costs. Treat profit as a fixed cost, like a loan payment or payroll, since none of us is in business to break even. Because pricing decisions require time and market research, the strategy of many business owners is to set prices once and "hope for the best. Cost-Plus Pricing Many manufacturers use cost-plus pricing.
The key to being successful with this method is making sure that the "plus" figure not only covers all overhead but generates the percentage of profit you require as well. If your overhead figure is not accurate, you risk profits that are too low. The following sample calculation should help you grasp the concept of cost-plus pricing:. Demand Price Demand pricing is determined by the optimum combination of volume and profit. Products usually sold through different sources at different prices--retailers, discount chains, wholesalers, or direct mail marketers--are examples of goods whose price is determined by demand.
A wholesaler might buy greater quantities than a retailer, which results in purchasing at a lower unit price.
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The wholesaler profits from a greater volume of sales of a product priced lower than that of the retailer. The retailer typically pays more per unit because he or she are unable to purchase, stock, and sell as great a quantity of product as a wholesaler does. This is why retailers charge higher prices to customers. Demand pricing is difficult to master because you must correctly calculate beforehand what price will generate the optimum relation of profit to volume.
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Competitive Pricing Competitive pricing is generally used when there's an established market price for a particular product or service. Competitive pricing is used most often within markets with commodity products, those that are difficult to differentiate from another. If there's a major market player, commonly referred to as the market leader, that company will often set the price that other, smaller companies within that same market will be compelled to follow. To use competitive pricing effectively, know the prices each competitor has established. Then figure out your optimum price and decide, based on direct comparison, whether you can defend the prices you've set.
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Should you wish to charge more than your competitors, be able to make a case for a higher price, such as providing a superior customer service or warranty policy. Before making a final commitment to your prices, make sure you know the level of price awareness within the market. If you use competitive pricing to set the fees for a service business, be aware that unlike a situation in which several companies are selling essentially the same products, services vary widely from one firm to another.
As a result, you can charge a higher fee for a superior service and still be considered competitive within your market.
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Markup Pricing Used by manufacturers, wholesalers, and retailers, a markup is calculated by adding a set amount to the cost of a product, which results in the price charged to the customer. To find the percentage of markup on cost, divide the dollar amount of markup by the dollar amount of product cost:. This pricing method often generates confusion--not to mention lost profits--among many first-time small-business owners because markup expressed as a percentage of cost is often confused with gross margin expressed as a percentage of selling price.
The next section discusses the difference in markup and margin in greater depth. Pricing Basics To price products, you need to get familiar with pricing structures, especially the difference between margin and markup.
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As mentioned, every product must be priced to cover its production or wholesale cost, freight charges, a proportionate share of overhead fixed and variable operating expenses , and a reasonable profit. Factors such as high overhead particularly when renting in prime mall or shopping center locations , unpredictable insurance rates, shrinkage shoplifting, employee or other theft, shippers' mistakes , seasonality, shifts in wholesale or raw material, increases in product costs and freight expenses, and sales or discounts will all affect the final pricing.
Overhead Expenses. Overhead refers to all nonlabor expenses required to operate your business. These expenses are either fixed or variable:.
Cost of Goods Sold. Cost of goods sold, also known as cost of sales, refers to your cost to purchase products for resale or to your cost to manufacture products.
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Freight and delivery charges are customarily included in this figure. Accountants segregate cost of goods on an operating statement because it provides a measure of gross-profit margin when compared with sales, an important yardstick for measuring the business' profitability.
Expressed as a percentage of total sales, cost of goods varies from one type of business to another. Normally, the cost of goods sold bears a close relationship to sales. It will fluctuate, however, if increases in the prices paid for merchandise cannot be offset by increases in sales prices, or if special bargain purchases increase profit margins. These situations seldom make a large percentage change in the relationship between cost of goods sold and sales, making cost of goods sold a semivariable expense.