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Businesses can set different profit rates, for example 15% profit on supplies and materials, 20% profit on labour/time, and 25% profit on overhead. These more complicated approaches to pricing usually emerge in response to special needs of a particular business.
If your research reveals that similar products or services are available on market at a cost much lower than what you could offer, you may have to either adjust your profit margin, return you expect, or decide to provide enough specialized service or selection that market will pay extra. Alternatively, you may be forced to conclude that you cannot afford to make this item or provide this service and look for something else to do.
NOTE: Remember to cost materials at level it costs to replace them - NOT at original prices; include salaries as a business expense; include interest in your business cost calculations -- interest that could have been accrued had money used in company been invested elsewhere (i.e. a bank); make allowances for future refunds, servicing, bad debts, amortization of capital costs of equipment or machinery.
"Rules of Thumb" in Setting Prices Some types of businesses charge prices according to certain "rules of thumb": For example: price is always twice labour plus materials, or twice materials plus labour depending on which is higher; price is always materials and labour plus 20% for fixed costs, plus 25% for profits.
Calculating actual costs is only proven way to make sure your prices cover your costs. Labour/time charges are to be covered partly in costs of production and partly as a salary in fixed/operating or overhead costs.
In summary, key points to consider in setting prices are: marketing strategy and your immediate goals competitors' prices, and market market demand for product and consumer buying trends need to cover costs and provide an adequate profit.
Step 2 Build a profile of your competitors
Ask yourself what products and services they offer. Do they overlap with yours? What customer needs and wants are they satisfying? What is their unique selling proposition? How do they position themselves? Are they Savoy or a McDonald’s? Is their mind-set corner shop, high street franchise or old establishment? Are they exclusive and high-priced or a dime-a-dozen? Are they as passionate and knowledgeable as you? How do they market themselves? Where do they advertise? What sales channels do they use – retail, direct mail, Internet, wholesale? What is their sales literature like? How good are their employees? Should you be considering enticing them over to you? Are they growing, level pegging or declining? If so, why? Use Internet to get hold of credit reports on them. Find out how many employees they have, and what they do.
Step 3 Develop a strategy
Develop a strategy through which you can stand out from rest. Two effective strategies are:
Specialization, differentiation, segmentation, concentration
Specialization is your area of excellence or core business. Differentiation is your competitive advantage, i.e. reason why customers buy product or service from you. Segmentation involves identifying your customers or market niche. Concentration means focusing all resources of business, hitting your market niche with your competitive advantage in your area of excellence. Many of us start out believing that business is about selling rubbish products to idiots who do not really need or want them, but are still persuaded to buy them at prices they certainly cannot afford. Apparently, this is not case. If we believe in free enterprise market system, then we believe, and a great deal of evidence suggests, that in order to run a successful business we must concentrate all our forces, hitting our market segment with our competitive advantage in our area of excellence.
Specialization Which product or service would you like to produce and sell? In which area of human activity would you like to improve lives of other people? To which area of human improvement can you bring excitement and enthusiasm? What is your area of excellence? What is your core business? For which product or service are you prepared to be a product champion? What would you love to do to improve lives of others for 16 hours each day, even if you received no financial reward? What is it that makes you feel valuable and worthwhile? Remember there is a strong relationship between high self-esteem and peak performance. The more you love doing something, greater will be your success. All successful businesses specialize in their areas of excellence. Many unsuccessful people drift into areas where they do not have excitement, enthusiasm, energy, knowledge, etc., to establish competitive advantage and find their market segment.
Step 4 Regular SWOT
Conduct a regular SWOT analysis of your competitors to ensure that you stay ahead.
What are your competitors' Main Strengths
Main weaknesses - where are they vulnerable and how can you take advantage?
Which opportunities can you identify?
Does your competitor pose a threat to you, and how will you overcome it?
Ben Botes MSc. MBA, is an Entrepreneur, Speaker, Writer, Coach and academic. He is the founder of My1stBusiness.com and the Co-founder of South African Business Hubs, Business support Hubs and incubators for the new breed of South African Entrepreneurs. Join the My1stbusiness.com Reseller Program and earn 40% referral commission http://www.my1stbusiness.com/affiliate