If a Business has to be profitable the sale price of its goods or services needs to be more than the cost price. A price that’s too high will lead to reduced sales. A price that’s too low will lead to reduced profits, and consumers that think there’s something wrong with the product. So what’s the answer? Let your market dictate your product’s price, that way you will find the optimum price at which you can make the most revenue. In other words find out how the price elasticity of demand affects your product. This video uses the example of a fish shop and a ferry service to explain price elasticity of demand and how it can affect volume of sales and revenue. Watch this video before you make any changes to your product’s price.
Let’s face it – setting the correct price isn’t an easy task. Even with all the “how to” books and courses it’s still not that easy. Here are some things you can find out before you make an informed decision.
Find out what the rest of the marketplace is charging for the same item. This sounds simple on paper, but the reality is there is likely a wide range of prices for the same item. What you can do is knock off the highest price and the lowest price and then calculate the average of the others.
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For example, you check the market and find 6 prices for Product A $20, $8, $15, $30, $10, $15 – you ignore the highest, which is $30 and the lowest which is $8, then you add together the balance and divide by the no of item prices in this case it’s 4 with an average price of $15.
Another method you can use is to experiment with price points. If you are new to the business you can use the market price to gain perspective and find a start point to experiment. If you are an existing business you can take your current price and increase it by 5% or 10% and the evaluate how that affects your sales volume and revenue.
There are all kinds of ways to set your product prices. Cost plus a percentage markup is one of the most common methods. However, the most effective is to let the market dictate your price.
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