Determining a Plan for Setting Prices

Entrepreneur:

I know of at least three common methods for setting prices for a new business, or for a new product or service within an existing business:

• Cost-based pricing: Set your price as a multiple of cost, or cost plus a determined amount. An example would be a book store selling each book for 150 percent of whatever amount the store paid for it. Another example is a clothing boutique selling items for twice what it paid to buy them.
• Value-based pricing: Base your price on what your product and service is worth to the buyer. Computer software, for example, is often priced according to the time-savings and productivity gains, rather than the direct cost. Some would say airlines use a value basis to price the same flight differently for different travelers; they’re cheaper for budget-minded consumers who buy with a lot of advance notice, and more expensive for the business traveler who has to go somewhere today.
• Market-based pricing: Let the market determine the price. This is the most common and most realistic pricing method for small and medium businesses. If everybody else charges $15 for a haircut, you charge $15 for a haircut, or some price related to $15 depending on your strategy. Maybe you want to be a low-cost provider, for example, so you charge less (which leads us to that very common pricing error).

via Bplans Blog.

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