Proper product pricing is only one facet of overall planning for
profitability. A second major factor to be determined once costs,
break-even point, and profitability goals have been analyzed, is the
selling strategy. Three sales planning approaches are used (often
concurrently) by businesses to develop final pricing policies, as they
strive to compete successfully.
In the first, employed as a short-term strategy in the earliest stages of a
business, the owner/manager sells products at such low prices that the
business only breaks even (no profit), while trying to attract future
steady customers. As volume grows, the owner/manager gradually builds in
the profit margin necessary to achieve the targeted Return on Investment.
“Loss leaders” are a second strategy practiced in both developing and
mature business. While a few items are sold at a loss, most goods are
priced for healthy profits. The hope is that while customers are in the
store to purchase the low-price items, they will also buy enough other
goods to make the seller’s overall profitability higher than if he had not
used “come-ons.” The seller wants to maximize total profit and can
sacrifice profit on a few items to achieve that goal.
The third strategy recognizes that maximum profit does not result only from
selling goods at relatively high profit margins. The relationship of
volume, price, cost of merchandise, and operational expenses determines
profitability. Price increases may result in fewer sales and decreased
profits. Reductions in prices, if sales volume is substantially increased,
may produce satisfactory profits.
There is no arbitrary rule about this. It is perfectly possible for two
stores, with different pricing structures to exist side by side and both be
successful. It is the owner/manager’s responsibility to identify and
understand the market factors that affect his or her unique business
circumstances. The level of service (delivery, availability of credit,
store hours, product advice, and the like) may permit a business to charge
higher prices in order to cover the costs of such services. Location, too,
often permits a business to charge more, since customers are often willing
to pay a premium for convenience.
The point is that many considerations go into setting selling prices. Some
small businesses do not seek to compete on price at all, finding an un- or
under-occupied market niche, which can be a more certain path to success.
What is important is that all factors that affect pricing must be
recognized and analyzed for their costs as well as their benefits.
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