How to guide your sales prices (8)

Setting a sales price—the amount to charge for something—is an audacious task. Whether this price is for a machine, food, software, or any service does not matter.

If the offerer charges the price too low, he earns less and may incur a loss; if he fixes it too high, he can lose sales or even exclude his offer from the market.

Offerers use many strategies, tactics, techniques, and even tricks to determine what price to charge. Not to mention that each bidder, each sales object, each market, and each moment can demand a different price.

Despite that diversity, there are six basic orientations to price a good or service, namely:

Cost and margin

In the cost and margin orientation, the price manager calculates the offer cost, chooses the profitability margin he wishes, and, using them, decides the price to charge.

Supply and demand

In the supply-and-demand orientation, the price manager analyzes the relationship between the sales object’s supply and demand and decides the offer price. If demand exceeds supply, the price tends to increase; otherwise, to decrease.

Competitors

In the competitor’s orientation, the provider reference is the prices charged by his competitors. Based on them, the price manager decides whether to charge a higher, lower, or equal amount for his offer (another post will address the competitive positioning of leader, challenger, follower, nicher, and outsider).

Customer-perceived value

In turn, in the value perceived by the customer orientation, the manager uses the price the client is willing to pay. This way, he seeks to maximize his revenue and minimize his losses, that is, to charge the highest possible price as long as it does not cause him to lose sales and customers.

Constituted authorities

In the constituted authority’s orientation, the price manager is limited to pricing the sales object as determined by the competent authority.

Illicit prescriptions

Illicit price prescriptions are all interventions by private economic actors that lead to illegal sales price practices, such as price cartels and resale price fixing, both of which are prohibited by law in the United States.

In everyday life, however, it is rare for a price manager to rely on only one of these guidelines. The most common procedure is to use an orientation—except the last two—to confirm or refute the price indicated by another and qualify the decision-making process.

For example, when applying the markup to the cost of a loaf of bread, a supermarket manager finds that its selling price should be $2.60. Yet, noting that his closest competitor sells the same bread for $2.50, he decides to mark it down to $2.45, which still gives him some profit. Thus, he uses both the cost and margin and competitor orientations.

C. L. Eckhard, author of Pricing in Agribusiness: setting and managing prices for better sales margins.