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The goal of almost every business owner is to generate a profit
either for themselves or their shareholders. This can be
challenging at best. So much thought and effort go into running
a business, accounts payable, accounts receivable, dealing with
vendors, customers, etc. Because of this people sometimes do not
focus on one of the most important factors- pricing. Knowing how
much you can charge for your product or service is invaluable
information. Businesses typically want to increase volume and
prices at the same time. In a perfect world that would be easy
to accomplish, yet we do not live in a perfect world. So just
how do businesses go about deciding how much to charge for a
product or service?
One way that businesses do this is through trial and error, by
seeing how much they can charge before volume starts to drop
off. This is a very ineffective method, but is practiced by more
businesses than you may realize. Another method is determining
what percentage of profit over cost that you want. Perhaps you
sell automobiles and decide that you require a profit of 5% on
every car that is sold, and then you price accordingly. While
this method is good for determining if you are going to cover
overhead and other expenses, it may not be the best way to
increase sales. A person can spend weeks trying to determine the
correct price for their products and services. Economists have
many formulas to determine price elasticity, market demand, and
cost shifting. All of these economic formulas can be helpful,
but are very time consuming and sometimes require hiring a
consultant.
There are some easier ways to go about setting prices. Once
you have determined a "ballpark" price that covers your costs,
you can begin adjusting it up or down to maximize profits. A
relatively new concept that is garnering a great deal of
attention from businesses big and small is the concept of price
popularity. Price popularity is just what the name implies,
looking at how popular, or how frequently a price is used.
For example, surely you have noticed how many commercials on
television sell items for $19.95. This is a very popular price
when compared to $19.77. Do you see many products priced at
$19.77? The frequency in which consumers see a price has a
strong effect on their purchasing decisions.
Knowing about price popularity, and how to apply it, can help
turn a slow selling item or service into a highly demanded item
or service. Should a business set a price at $19.99 or $19.95?
Does a price read differently to a consumer if it appears as
$72.00 or $72? Research shows that it does in fact affect a
consumer's decision making. Gaining access to the research
that shows the most popular prices, the ones that consumers
feel most comfortable with, is a precious resource to a
business. This is much easier than spending the numerous hours
of financial analysis to make an educated guess at what volume
business will drop off if you raise or lower the price by a mere
few cents.
The more a business owner knows about pricing strategies the
more successful they will be in generating profits. Incorrect
pricing can have devastating effects on a business. While many
spend time trying to determine a break-even analysis and price
elasticity, how many have really considered the psychological
appearance of a price and the popularity of that price.
In today's extremely competitive business world a business owner
needs every advantage they can get to outwit their competition.
Researching the information available on price popularity simply
puts a business one step ahead of their competitors.
Writer's Resource Box:
Konstantin Goudkov studies the psychology of pricing,
ways to manipulate prices for maximum profit, and tactics
to control consumer price perception.
You can find his latest report at:
http://www.PricePointReport.com
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