Forums: Discussions for entrepreneurs and small business.

I have no formal training in business, nor an MBA, so I`m looking for some help on the following premise. We`ll assume a product, and that cost of production is definitely below the sale price. We`ll also assume that the product is selling.

People have written the general formula for determing a way to price a product for retail sales. Take the costs, multiply by some percentage, and that`s the suggested retail price. Okay, that`s fine. This is more of a "certainty" question: when you come up with a price, how do you know for sure that you`re at the best price, not too low, but also not too high?

Is there a logical or mathematical or evidentiary way to know the correct price?

My thinking is that when you reach a price where other people think they can compete with you, that`s the basic market price. So for example; you`re test-marketing a $5 item, not counting your labor, and it sells say on eBay for say $20. You try other price points, and it seems to stop selling at $30.

Is $30 the "true" market price? There`s the eBay venue, with it`s problems and mentality, and perhaps if you sold it at Nordstrom`s, it would bring in $90.

But sell it at $10, and nobody could compete, because of commercial manufacturing costs. On the other hand, when you price it at $40, it may not sell on eBay, but that`s where "any" company could profitably enter into competition with you. Is that the true, or "real" market price?

I don`t know, so I`m asking the financial people and business analysts in the community if there`s some formula for this kind of thing?

Craig - I`m not a financial guru nor do I play one on TV. But I have been in business for many years - for others and for myself. I don`t believe there is any one "magic" formula for ALL products or ALL industries. I believe eBay examples are entirely different than brick & mortar and even compared to service type businesses.

If you`re in business selling product(s) and have a benchmark of 40% GP and have operating expenses at 38%, you`re at a 2% Net. If you`re doing $50 million annually at 2% net, you made a cool $1 million. But if you`re at $50K annually at 2% net, you made $1000. Same factors, different results.

What the market can bear many times dictates price. The bottom line ... the seller has to determine what they can live with based on their own limitations, restrictions, requirements, etc. I`m sure you can find "norms" in most industries, but a "one size fits all" formula ... I seriously doubt it.

Speaking of money ... that`s my $.02 worth

R@

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Richard Arnold · Key Concept Writers · Business Communication: The "Key" To Success· Law of Attraction Blog · Life Ain`t Brain Surgery Blog

Zounds! I was hoping there was a place where someone has The Answer. Kinda like on the Internet SOMEone is in charge of life! :-)

I know there`s no real magic formula, but I`m wondering how other business people develop a sense of certainty about that comfort level---what they can live with etc.

I also see where a company comes out with a robotic vacuum cleaner for $150. Then the EuroPro people or someone like them copy it, for $70. Set aside patent issues: What I`m interested in is suppose the first company came out with their product for $65. Would EuroPro have tried to copy them? Depends on cost factors.

Suppose the first company was comfortable with a 2% profit, and they`re very small. There isn`t a "market," so to speak yet. Wouldn`t the "market price" begin when some other competitor felt it was worth while to enter into that new market?

Enh...I dunno. As I said, I`m not a business MBA...just a guy asking questions....looking for answers.

There are too many variables to ever come up with an answer to this. Pricing is not really about what any one product or service is worth, it is more of what it is perceived to be worth. For instance, during our focus groups trying to come up with the price/value proposition the same product manufactured by the exact same corporation/people/factory etc. the ‘sweet spot’ (what people expected to pay, with no prior knowledge of how expensive/inexpensive it was) was between 99 and 120 bucks. From there on for every ten dollars that the price went up we lost 50% of our potential customers, interestingly enough the same thing starts to happen when we price the product below 80 bucks, finding no buyers at $30! The general perception was the cheaper it gets the more likely it is to be a scam or a terribly built product. Bottom line, pricing is more an art than a science, find out what the perceived value proposition is and hit that bull’s head (ideally this price would give you a nice margin).

Well poop! 

Philosophy doesn`t at ALL provide concrete, absolute answers. It only organizes stuff. I`m into organizing stuff, I like databases, I like field programming, and that sort of thing. It looks like I`m going to have to organize the true value of a product under the category of Magic! Dayum....!

I appreciate your thoughts, everyone. It seemed like a good idea, having a more formulated way to figure out that "sweet spot," as Eli mentioned. But it looks like it`s one of those dratted "consensus" things, which I ordinarily dislike.

On the other hand, if something is only worth what someone else is willing to pay for it, then I see there`s no way to avoid a consensus. It`s a subjective decision, basically. The intrinsic value of something is one thing, but I think I`ll have to totally separate that from the perceived value.

Not that I`ve ignored perception of value. I just thought maybe since it was Friday, I could casually remove it from the analysis. :-)