Recipe Archive

RISCORE's August Recipe for Small Business Success

How do you set your prices – and what effect does the cost have on the price? Obviously the relationship is important. The difference between them is your gross profit margin and that’s the starting point for your financial planning.

Countless clients tell us they add up their costs, then add 20% or 40% or 100% and that’s how they set the price. WHY??? Price and cost are based on entirely different things and what you do with one has no effect on the other.

Price is an agreement between your customer and you. It is what your product or service is worth to your customer, and that’s all that matters.

Teenagers pay $150 for Nike sneakers because they want their friends to see the “Swoosh”. They don’t care if the sneakers only cost $20 to make in an Asian factory.

People pay $200 for Microsoft “Office” software. What does it cost for Microsoft to make one more copy of “Office” after the millions they have already made? The packaging costs more than the product.

You probably don’t have a market position like Nike or Microsoft, but think about what you can do to warrant a higher price in the marketplace. Try not to be a “commodity” where all products are alike and customers can play one supplier against another to extract the lowest possible price. Have something distinctive about your product or service that sets it above the crowd.

Super customer service is always a winner. Talk to a Score counselor about conditions that apply to your particular product and market situation.

Don’t cost price. And don’t price too low; It’s a lot easier to make the rest of your financial projections work if you are starting with 70% gross margin than if you are starting with 20%!