[Financial]:::Price And Place

No. 60 Monday, March 1, 2010
"Price" refers to how much you charge for your product or service. Determining your product's price can be tricky and even frightening. Many small business owners feel they must absolutely have the lowest price around. So they begin their business by creating an impression of bargain pricing.

   However, this may be a signal of low quality and not part of the image you want to portray. Your pricing approach should reflect the appropriate positioning of your product in the market and result in a price that covers your cost per item and includes a profit margin. The result should neither be greedy nor timid. The former will price you out of the market; pricing too low will make it impossible to grow.
   As a manager, you can follow a number of alternative pricing strategies. We now look at eight common pricing strategies. Some price decisions may involve complex calculation methods, while others are intuitive judgments.
Your selection of a pricing strategy should be based on your product, customer demand, the competitive environment, and the other products you will offer.


PRICING STRATEGY
   Cost-plus: Adds a standard percentage of profit above the cost of producing a product. Accurately assessing fixed and variable costs is an important part of this pricing method.
   Value-based: Based on the buyer's perception of value (rather than on your costs). The buyer's perception depends on all aspects of the product, including non-price factors such as quality, healthfulness, and prestige.
   Competitive: Based on prices charged by competing firms for competing products. This pricing structure is relatively simple to follow because you maintain your price relative to your competitors' prices. In some cases, you can directly observe your competitors' prices and respond to any price changes. In other cases, customers will select vendors based on bids submitted simultaneously. In those cases, gathering information will be more difficult.
   Going-rate: A price charged that is the common or going­rate in the marketplace. Going-rate pricing is common in markets where most firms have little or no control over the market price.
   Skimming: Involves the introduction of a product at a high price for affluent consumers. 'Later, the price is decreased as the market be­comes saturated.
   Discount: Based on a reduction in the advertised price. A coupon is an example of a discounted price.
   Loss-leader: Based on selling at a price lower than the cost of production to attract customers to the store to buy other products.
   Psychological: Based on a price that looks better, for example, $99.99 per pound instead of $100.00 per pound. 

OTHER PRICING FAC­TORS
   After you decide on your pricing strategy, the amount of money you will actually receive may be complicated by other pricing aspects that will decrease (or increase) the actual amount of money you receive. You will also have to decide how to determine:
   Payment period: Length of time before payment is received.
   Allowance: Price reductions given when a retailer agrees to undertake some promotional activity for you, such as maintaining an in­store display.
   Seasonal allowances: Reductions given when an order is placed during seasons that typically have low sales volumes to entice customers to buy during slow times.
   Bundling of products/ser­vices: Offering an array of products together.
   Trade discounts (also called "functional discounts"): Payments to distribution channel members for performing some function such as warehousing and shelf stocking.
   Price flexibility: Ability of salesperson or reseller to modify price.
   Price differences among target customer groups: Pricing variance among target markets.
   Price differences among geographic areas: Pricing variance among geographic regions.
   Volume discounts and wholesale pricing: Price reductions given for large purchases.
   Cash and early payment discounts: Policies to speed payment and thereby provide liquidity.
   Credit terms: Policies that allow customers to pay for products at a later date.
   The methods discussed here should be a base from which to construct your price. Your options will vary depending on how you choose to sell your product. For instance, if you make a product but don't sell it directly to the customer, then you will want to know who sets the retail price and what mar­gin they will require. Tracing the path of your product from production to final purchase is a useful exercise to discover this information. The research needed to understand the pricing along the distribution path will be more than worth the time it takes.
   Whatever your price may be, ultimately it must cover your costs, contribute to your image by communicating the perceived value of your product, counter the competition's offer, and avoid deadly price wars. Remember, price is the one "P" that generates revenue, while the other three "P's" incur costs. Effective pricing is important to the success of your business.


PLACE
   We begin to look at place here and how important location is to the success of your new business.
   "Place" refers to the distribution channels used to get your product to your customers. What your product is will greatly influence how you distribute it. If, for example, you own a small retail store or offer a service to your local community, then you are at the end of the distribution chain, and so you will be supplying directly to the customer. Businesses that create or assemble a product will have two options: selling directly to consumers or selling to a vendor.

DIRECT SALES
   As a producer, you must decide if supplying direct is appropriate for your product, whether it be sales through retail, door to-door, mail order, e-commerce, on-site, or some other method. An advantage of direct sales would be the contact you gain by meeting customers face to face. With this contact you can easily detect market changes that occur and adapt to them. You also have complete control over your product range, how it is sold, and at what price.
   Direct sales may be a good place to start when the supply of your product is limited or seasonal. For example, direct sales for many home-produced products can occur through home-based sales, markets, and stands.
   However, direct sales re­quire that you have an effective retail interface with your customers, which may be in person or electronic. If developing and maintaining this re­tail interface is not of interest to you or you are not good at it, you should consider selling through an intermediary.
   Join us next week as we look to distribution and pro­motional channels and other important tips for new businesses.