How to know when the price is right - WDAM - TV 7 - News, Weather and Sports

How to know when the price is right

Sometimes, it makes good business sense to cut prices. (©iStockphoto.com/Lisa Fletcher) Sometimes, it makes good business sense to cut prices. (©iStockphoto.com/Lisa Fletcher)
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 The last time you were on an airplane, you were likely sitting near someone who paid twice as much as you did for a ticket. You were probably just as close to someone who paid only half your fare. Airlines have complicated algorithms for pricing their seats: Business travelers are willing to pay more on short notice, while leisure travelers plan ahead and deal with travel restrictions to pay much less.

Small business owners don't have the luxury of complicated pricing algorithms to determine how much to charge for their goods and services. Accounting for such factors as competition, costs and customers can prove tricky when running a small business.

While pricing below the competition might seem like a great way to drive sales, it may actually create the opposite effect. Cutting prices decreases your profit margin. Invariably, your competition will slash their price to catch up, effectively trapping you with your lower margins. This can be especially difficult if you are up against a larger chain store or businesses that are more diversified than yours. Instead, consider offering (and marketing) low-cost ancillary benefits that might allow you to price above the competition: better service, exclusive branding, or a personal touch.

Of course, costs need to be accounted for when setting prices. Be sure not to exclude overhead, labor, and the cost of goods in your calculations. You wouldn't want to lose money for selling an item.

In some businesses, other pricing techniques, such as volume discounts and price floors, can lead to maximized profits.

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