3 Ways to Price

Setting a price for your product can be challenging to say the least. Setting a price that customers are willing to pay and making sure your costs are covered is top priority. Businesses that lose money tend to not stay in business for very long. Some say that price is an indication of quality. Depending on the quality of your product you may want to price accordingly.  Tell me that low price high quality doesn’t exist, and I will give you directions to In-N-Out Burger. Should you set your price high or low? With low prices you need high volume to make money and with high prices you can expect lower volume.  It is simple supply and demand.  Here are 3 ways to price your product.

Cost Plus

asia carrot chopsticks delicious
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Cost plus pricing is exactly what you imagined.  The cost of your product plus a markup typically a certain percentage. Figuring out the true cost of you product or service can be difficult.  Let’s say for example that you run a Poke restaurant and you would like to implement cost plus pricing.  In a one-scoop poke bowl the customer picks white rice, tuna, seaweed salad, cucumbers, green onions, sesame seeds, mustard soy sauce, and jalapenos.  Surely you can figure out the cost of each item in the bowl, but don’t forget the bowl, chopsticks, fork, and napkins. Also, keeping the portion sizes consistent is key because if additional product is added without an additional charge the cost plus margin will be impacted.  Finally, you need to account for the fixed costs of your restaurant.  The space that you rent, electricity, and labor.  These costs need to be allocated to your product in order to set a price that will be profitable.

Benchmarking

Before you even open a restaurant it is wise to scope out your competition and examine prices.  Examine the prices of every competitors store in your geographic area.  Examine the prices of every competitors store in your state.  Examine the prices of substitutes.  For example, if you are planning on opening a sandwich shop, your should look at the prices at fast food restaurants, mediterranean restaurants, and chinese food.  When your customer decides to eat they may look at prices across different categories of food.  Once you have compiled detailed pricing information from your competitors you need to determine where to position your business in the market.  Will you offer superior quality to all existing establishments and price higher?  Will you strive for high volume low cost? Figure out where you would like to position your business in the market using a price-quality chart.  On the y-axis is price increasing from 0 at the origin and on the x-axis is quality starting at nearly inedible.  Plot all of your competitors on the chart and pick a place for your business.  Don’t forget that you need to cover all of your costs to remain profitable.  If you’re too busy to do this DJR Jeeves Consulting can help.

Demand Based Pricing

full drinking glass with slice of lime
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Pricing can be variable. If you sell ice cream chances are that your business volume increases on days that are above 85 degrees fahrenheit.  What if you could change your prices dynamically with the temperature?  Hot weather and high demand results in higher price.  Cold weather and low demand results in lower price. Some may say that this pricing tactic is not fair. This is not considered price gouging. This is smart pricing.  Demand based pricing takes into account a customer’s willingness to pay. Imagine you are in Death Valley without water. On the horizon you see a person riding a Zebra with a sign reading Water- Price: Willingness to Pay. It is likely that you would be willing to pay a lot more than the $2.00 that 7-Eleven would charge you on an ordinary day. However, this may be considered price gouging.

Contact DJR Jeeves Consulting for your pricing needs.

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