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How to price your product or service [Decision Making
Posted on December 6, 2012 @ 07:03:00 PM by Paul Meagher

Entrepreneurs don't always have the luxury of setting a price for their product or service. If we are in a competitive market, the price of a product or service might already be determined by existing competitor prices. For example, it is difficult to price an oil change much higher than what local competitors charge (and expect to get a significant share of that business).

If you are in the fortunate situation where there is some elasticity in price setting, then the question arises as to what price you should charge for your product or service. Wikipedia offers a buffet of pricing strategies you might want to consider in such situations.

One pricing strategy that the Wikipedia article does not explicitly discuss is optimal pricing where we trade off volume for price in such a way as to maximize profit, which should not be confused with gross revenue. If we simply seek to sell as many units as possible so as to maximize gross revenue, then it is possible that our costs will start to go up once we hit a certain volume because we have to add more labor, equipment, buildings, traincars, etc... to the mix and these factors serve to reduce the overall profit such that our overall profit is less than if we sold fewer units.

You can't do optimal pricing if you don't know your fixed and variable costs and how they are affected when you increase production.

The next time you walk into Canadian Tire, you might ponder why they try to achieve the lowest pricing possible this time of year. If they are using an optimal pricing strategy, it could be because in the ramp up to xmas they can find economies of scale associated with significantly increased volumes of production that allow them to set prices lower and achieve the optimal level of profits possible over the forth quarter of 2012. Canadian Tire adverstises for pricing analysts whose job it is to find optimal pricing strategies for the products they carry. It might be a useful thought experiment to imagine yourself as a pricing analyst for Canadian Tire and then apply the same framework to figuring out how to price your own products or services.

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