Proper pricing provides profits
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The common wisdom is that most new businesses will fail. Many reasons are given for this eventuality: marketing, financing, ability to produce a product or provide a service and pricing. Paramount among these explanations for failure is improper pricing, both too high and too low.
Meeting all needed costs, direct, indirect and profit is essential. Direct (or variable) costs are related to per unit input amounts. Raw materials and labor used in making each unit. Overhead is made up of all other costs associated with having a business: rent, insurance, marketing, depreciation interest repair, taxes, insurance, other miscellaneous, office expense and profit. This is the floor price; selling below this level will reduce profits and/or result in a loss.
Good market research will help determine the ceiling price. What will the market bear? How much can be asked to still be viable within a certain market that insures sufficient volume? This volume should closely match capacity to produce. The Michigan State University Product Center – Food, Ag, Bio has many tools to assist clients with market research.
Understanding the floor andceiling approach to pricing will provide a price point that insures meeting all expenses – direct (input) and fixed (overhead). Somewhere between the floor and the ceiling price is the sweet spot that will both meet costs and allow for sufficient velocity of production.
Additional information regarding, “Setting the Right Price” can be found from the Southern Regional Development Center website.
