The Pricing Dilemma

Scratching your head about what to charge for your product? Several factors need to be considered in determining the price of a product. Some of those factors are:

1) Production cost: the price needs to be sufficient to cover (at least) the variable cost of making it. For example, if you need to buy rubber soles to make a pair of shoes to be sold, your price must cover the cost of the rubber soles. If not, the product will never generate a profit regardless of how many units (in this case, shoes) are sold.

2) Competitive offering: Your price should take into account the pricing policy of competing products, especially if your customers are price sensitive. This means you need to carefully and honestly evaluate how your product compares with those of competitors, and perhaps increase/decrease your price accordingly

3) Financing cost: In instances where customers do not make payments immediately, you may be able to reflect the time value or financing cost in your price to maintain profitability

4) Brand value: If your product or company has substantial brand value, you may consider reflecting this premium in your product price (if the competitive environment permits). Brand value often arises because the market recognizes that your product or company is superior to others in the same field.

5) Warranty costs: If you provide a product/service guaranty in the case of product failure, this should be factored into your product price.

6) Volume strategy: If you want your products to fly off the “shelves”, you may decide to reduce the unit price in order to increase demand. This means you need to sell a lot of units to be profitable. This strategy assumes you are capable to producing at high volume to meet high demand, but could lead to a price war if competitors adopt a similar approach.