Methods for Determining Price
Adapted from content excerpted from the American Express® OPEN Small Business Network
You have several different pricing methods available to you. Each has its advantages and disadvantages, and choosing the right technique can be crucial to maximizing your profits. Here are brief descriptions of each method.
This pricing method is designed to assure that fixed and variable costs are covered and that profit is built in. To use cost-plus pricing add direct and indirect costs to profit to arrive at your price. It is crucial that you calculate all costs when using this method to set pricing because an omission will lead to a reduction in profit.
If the market you are entering has an established price and differentiation between products is difficult, you may need to use competitive pricing. If you choose to set a different price in an industry with established pricing for products that are difficult to differentiate between, be sure you can defend the prices you are setting and that an awareness of price among your target market does not make this out of the question.
Usually used by retailers, it is calculated by adding a specific amount to the cost of a product.
If you sell products to a variety of entities who purchase very different volumes of goods from you, you may want to use demand pricing. For example, a manufacturer who sells to retailers and wholesalers will give a better deal to wholesalers for purchasing in greater quantity. Keep in mind that according to the Robinson-Patman Act of 1939 you must charge the same price to all customers for identical products. If you want to offer different prices, you must establish pricing discounts available to any customer who can buy in volume.
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