A critical factor in any business is developing an effective pricing policy that will maximize profits. Maximum profit does not necessarily result from selling goods at the highest possible profit margins. There is a relationship between the price, volume sold, cost of merchandise, and operational expenses that ultimately determines profitability.
Although increasing price may result in a decrease in sales volume, this approach may actually generate a greater total profit. If sales volume is too low, however it may decrease total profits. Alternatively, dropping prices may create a large enough increase in sales volume to generate greater total profits. Again, if volume is not increased enough a lower profit total may result.
When it comes to making a pricing determination, the first factor you need to know is the cost of doing business as well as the product's cost per unit. This may require some detailed research and analysis to come up with some accurate estimates. You will not be able to determine these numbers with 100% accuracy, but it should be as close as possible.
Your estimates need to be accurate enough that you can be assured you are pricing your products at a profit and not a loss. Underestimating actual costs involved in their products and overhead is a root cause for the failure of many businesses. You don't want to find out after the fact that you have actually been selling your products at a loss.
The estimated cost of finished or raw materials, labor, indirect overhead, and research and development must be determined before setting the final selling price of items. These factors must be re-evaluated as costs fluctuate.
No matter what approach you decide will achieve the maximum levels of profit, the approach for determining product costs will involve four expense categories. These categories are: Labor Costs, Materials Costs, Overhead Per Unit and the Desired Profit Margin.
The combination of these four factors will allow you to determine the minimum price you can charge for each unit. Additional information about these factors in provided in the resource described below.
Product cost, break even points and minimum acceptable profit estimates are only one element in creating a profitable business plan. After you have determined these numbers you will also need to decide on the most effective sales strategy. There are three main sales strategies that are common in business. By using one or all of these strategies you can develop a final pricing plan that will allow you to compete in your market most effectively.
Determining a products price involves many considerations. Even though many businesses try to compete on price alone this is not the only option. Often a business can avoid price wars by finding a market niche that is not being served well enough or by offering a more effective solution. No matter which approach you take, however, it is essential that you recognize and fully analyze all of the costs involved in your product to determine it's pricing. - 16890
Although increasing price may result in a decrease in sales volume, this approach may actually generate a greater total profit. If sales volume is too low, however it may decrease total profits. Alternatively, dropping prices may create a large enough increase in sales volume to generate greater total profits. Again, if volume is not increased enough a lower profit total may result.
When it comes to making a pricing determination, the first factor you need to know is the cost of doing business as well as the product's cost per unit. This may require some detailed research and analysis to come up with some accurate estimates. You will not be able to determine these numbers with 100% accuracy, but it should be as close as possible.
Your estimates need to be accurate enough that you can be assured you are pricing your products at a profit and not a loss. Underestimating actual costs involved in their products and overhead is a root cause for the failure of many businesses. You don't want to find out after the fact that you have actually been selling your products at a loss.
The estimated cost of finished or raw materials, labor, indirect overhead, and research and development must be determined before setting the final selling price of items. These factors must be re-evaluated as costs fluctuate.
No matter what approach you decide will achieve the maximum levels of profit, the approach for determining product costs will involve four expense categories. These categories are: Labor Costs, Materials Costs, Overhead Per Unit and the Desired Profit Margin.
The combination of these four factors will allow you to determine the minimum price you can charge for each unit. Additional information about these factors in provided in the resource described below.
Product cost, break even points and minimum acceptable profit estimates are only one element in creating a profitable business plan. After you have determined these numbers you will also need to decide on the most effective sales strategy. There are three main sales strategies that are common in business. By using one or all of these strategies you can develop a final pricing plan that will allow you to compete in your market most effectively.
Determining a products price involves many considerations. Even though many businesses try to compete on price alone this is not the only option. Often a business can avoid price wars by finding a market niche that is not being served well enough or by offering a more effective solution. No matter which approach you take, however, it is essential that you recognize and fully analyze all of the costs involved in your product to determine it's pricing. - 16890
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For a more complete explanation of how to develop your pricing plan along with examples and the 3 primary sales strategies most businesses use to develop the most profitable pricing strategy visit the Top Business Resources Site.
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