The 'Scientific Way' to Determine the Price of Your Products

In essence, Moses is describing a ‘pricing equilibrium’ that exists between how much customers are willing to pay, how much your competitors are charging for the same (or similar) products, and how much money you need to make to recoup costs and still make a profit. You need to keep this equilibrium balanced, to ensure you get:

• More customers buying from you
• Less pressure from competitors
• Sufficient profit to cover costs and grow your business

Prices in Direct Sales 

“Direct sales methods offer the perfect opportunity to determine the best possible price for a product,” says Moses. The best price, he adds, is that which results in maximum profitability (profitability = total revenue - total costs). 

Obviously, price is a major determinant for the number of items you sell when placing a given ad. An item priced at $9.99 will usually sell better than the same item priced at $15.99. Moses says running different ad campaigns, with varying price points, can enable you to “scientifically determine” the price point that brings in the greatest profit. 

For example, if this item costs you $5.00, selling 250 at $9.99 (for a profit of [9.99 x 250 - 5 x 250] = $1,247.50) makes better sense than selling 100 at $15.99 (for a profit of [15.99 x 100 - 5 x 200] = $1,099.00). Because the $9.99 price sells sufficiently better than the $15.99 price – resulting in a higher overall profit margin – underselling the competition could be in your best interest. However, it is a gamble. 

Retail Sales 

This is where the ‘pricing equilibrium’ comes into play. Cellular retailers cannot use pricing strategies as exacting as those in direct sales. “The same principles exist, but in retail you can’t charge one price to a certain group of customers and a completely different price to another,” says Moses.  

Retail pricing depends on: 

• Underlying total costs of products
• Competitor prices
• Consumer sentiments and ability to pay
• The amount of business you receive from customers

A retailer cannot stay in business when forced to charge less than the total underlying costs of products. And the costs are many, with both sales costs (product cost, sales staff salaries, advertising and shipping) and operational costs (utilities, debt service, non-sales staff salaries, lease or mortgage costs, insurance and taxes). 

The key, Moses says, is to determine the total cost of operating your business and setting a break-even point (hence equilibrium) accordingly. “Based on that, you can set prices for your products, realizing that as in direct sales, higher or lower price points will yield varying total revenues.” 

Compare your potential prices the prices your competitors charge. Adjust your prices to be competitive, while keeping in mind the margin you need to assure the desired level of profitability.  

Customer sentiment and ability to pay are major factors in what you can charge, he adds. “Consumer sentiment changes often, depending on local, national and global economic trends beyond your control. Paying close attention to customer sentiment and ability to pay can help you keep prices in line with what customers feel comfortable paying for an item or service.” 

Regularly Monitor Costs, Prices, Competitiveness and Profitability 

“Even when your business is functioning smoothly, with steady profitability, you should regularly review underlying costs and prices to see if costs can be reduced and if prices can be raised (to increase profitability) or lowered (to generate more sales),” says Moses. 

Profitability is a blend of cost, price and amount of sales. Constantly examine this mix to see if there are ways to increase profitability.  

“Since underlying costs are the basis for setting prices, reducing costs is the most effective way to lower prices. It’s often said that every dollar of cost-saving falls all the way to the bottom line. This is reason for you to continually examine ways to control and reduce costs.”