The ability to choose a pricing policy and apply it to your product or service is an important skill for all entrepreneurs. This activity will provide practice doing basic pricing calculations, using your product costs and your markup.
Step 1: Identify Pricing Risk Factors
Determine risks associated with your pricing objectives. Look at how the price is affected by:
supply and demand
the competition
economic conditions
government regulations
How does the target market itself affect your pricing?
Open a document and title it Pricing.
Create a heading on the document and label it Risk Factors.
Write four to five sentences that describe your product in relation to each of the specific risk factors.
Step 2: Determine Your Pricing Objective(s)
Determine your pricing objective. Note that you can choose to maximize sales, profits, market share, or simply to cover your costs and earn a modest profit.
Create a second heading on the document and label it Pricing Objectives.
Write your pricing objective in one or two sentences. Note that you may decide to optimize on more than one objective at the same time.
Step 3: List the Pricing Factors and Calculate
Open a spreadsheet and title it Pricing Worksheet.
Create five columns with the following headings:
Product/Service
Cost of Goods
Cost of Sales
Markup
Product Price
Discount
Select one of your products or services and add it to the worksheet under Product or Service.
Continue across the row to fill in the cost of goods, cost of sales, markup, product price, and discount for each product or service listed. Add at least two products or services.
Cost of Goods: This is the amount of money you’ll spend to get your product ready for sale, including the cost of materials, labor, and even the cost to dispose of waste from the manufacturing process.
Cost of Sales: This is the amount of money you’ll spend to market and sell your product or service.
Markup: This is the fixed amount or percentage you plan to add for profit, in addition to the costs.
Product Price: Based on the pricing factors you identified in the previous step, either add or multiply the markup to the total costs to calculate your product price. Note whether this is the wholesale or final retail price and list both if appropriate.
Discount: Consider the fact that you will likely want to offer a discount at some point, whether your product is priced for the wholesale or retail market. In the final column apply a percent or fixed dollar discount to your product price.
Step 4: Reflect
Add a final heading to your Pricing document and Label it Pricing Reflection
Review the Pricing Worksheet and, in two to three sentences, reflect on how your pricing strategies worked when applied to your product or service. What worked well, or what will you need to change?
Submit the document and spreadsheet.
Pricing
Risk Factors
- Supply and demand: The demand for luxury handbags may fluctuate based on economic conditions.
- Competition: There are other high-end handbag brands in the market that may affect pricing.
- Economic conditions: In a recession, customers may be less willing to pay high prices for luxury items.
- Government regulations: Import tariffs may impact the cost of materials used in production.
- Target market: The target market for luxury handbags is typically affluent individuals who are willing to pay premium prices.
Pricing Objectives
- Maximize profits while maintaining a strong brand image
Pricing Worksheet
| Product/Service | Cost of Goods | Cost of Sales | Markup | Product Price | Discount |
|-----------------|--------------|--------------|--------|--------------|----------|
| Luxury Handbag | $50 | $20 | 100% | $140 | 10% |
| Leather Wallet | $10 | $5 | 75% | $22.50 | 5% |
Pricing Reflection
Upon reviewing the pricing worksheet, it appears that the pricing strategy of a 100% markup for the luxury handbag and a 75% markup for the leather wallet worked well in achieving the objective of maximizing profits. However, the discounts offered may need to be adjusted to better align with market demand and competition. In the future, I may need to consider more dynamic pricing strategies to respond to changing market conditions.