Setting Pricing Objectives

Before you establish specific prices for your products or services, decide your pricing objectives. Make careful decisions regarding the small business pricing strategy and methods best suited for your business and industry. Remember, your most important objective is to achieve maximum profitability.

Small Business Pricing Objectives:

• preparing your pricing policies

• selecting your specific product/service pricing strategies

• establishing your actual selling prices

Also, you should:

• do your homework and gather competitor pricing from the marketplace

• NOT call your competitors for their prices – this is illegal in the US

Below are general guidelines for developing the pricing of a new product/service for your business, unfortunately there is no formula to determine the "best pricing". Here is an overview of a Small Business Pricing Strategy Matrix.

1. Make Product/Service Marketing Mix Decisions

• define your product or service

• identify the distribution for your product/service

• describe specific promotional tactics

2. Project Customer Demand – It is important to understand the impact of your pricing on sales by estimating how your customer demand may fluctuate with price changes. For existing products/services, you can experiment with prices above and below the current price in order to determine the impact of pricing on customer demand. If your demand does not decrease with raising your price this indicates that price increases might be feasible.

3. Calculate Product/Service Cost - In order to make a profit from the launch of a new product/service you need a basic understanding of the costs involved. The unit cost of your product/service sets the lower limit of what you might charge, and determines your profit margin at higher prices.
   
   The total unit cost of your product/service is made up of a fixed cost regardless of the quantity you produce and the variable cost of producing each additional unit. Your pricing policy should consider both these costs.

• fixed costs - office rent, interest on debt, insurance, equipment expenses, business licenses, and salary of permanent full-time workers
    

• variable costs - production labor time, materials & packaging

4. Understand External Influences - Pricing must take into account the competitive and legal environment in which your company operates. 

   • Competitor Pricing Actions

     • what are the implications on your business

     • competitor reactions to your pricing decisions

     For example, setting the price too low may risk a price war that may not be in the best interest of anyone. Setting the price too high may attract a large number of competitors who want to share in the profits. 

   • Legal Constraints

     • There may be price controls that prohibit pricing a product/service too high

     • Offering a different price for different customers may violate laws against price discrimination

     • Pricing it too low may be considered predatory pricing or "dumping"

     • Collusion with competitors to fix prices at an agreed level is illegal in the U.S.

5. Establish Pricing Objectives - Pricing objectives state your overall goals you want to achieve through your pricing efforts. Because, pricing effects most business areas including finance, accounting and production. The major pricing objectives are market share, meeting competition and profit. 

   • Maximize Profit - seeks to maximize current profit, taking into account revenue and costs. Current profit maximization may not be the best objective, if it results in lower long-term profits

   • Maximize Revenue - seeks to maximize current revenue with no regard to profit margins. The underlying objective often is to maximize long-term profits by increasing market share and lowering costs

   • Maximize Quantity - seeks to maximize the number of units sold or the number of customers served in order to decrease long-term costs as predicted by the experience curve

   • Price Equilibrium - seeks steady state pricing in order to avoid price wars and maintain a moderate but stable level of profit 

6. Determine Prices - using the information collected in the above steps, select a:

• pricing method

• develop your pricing structure

• define if, how, when and under what specific circumstances you will use any promotional pricing 

More on Small Business Pricing:

What about Low Pricing

Standard Pricing Methodologies

Promotional & Discounting Pricing Methods

New Product/Service Pricing Methods