Determining price

One of the challenges in setting up Tight Design is determining where to set the product price. Set the price too high and not enough customers will buy. Set it too low and it doesn't cover costs. To start the process I went about collecting information on competitor pricing. I needed to know what similar products were being sold for. Next on the 'to do list', was to determine the cost of the product. It was important to check that I included all of the costs, such as freight, GST, packaging, import duty, currency conversion, foreign currency tax and to account for the variations in currency rates. Added to these direct costs were the overheads such as marketing, along with the capital costs in setting up a website and logo. I needed to think about who my target market is and their capacity to buy. And last, but not least, I needed to think about economic factors in determing price.

The question then, is to what extent do these various factors contribute to product price. For example, if all of the overheads were allocated to product cost, then the price would be too high. And where do I want to sit in the market in relation to my competitors? Do I want to be an exclusive product and set the price higher than my competitors, or provide a good value product at a lower price? Below are some of the pricing strategies that I considered.

1. Cost plus pricing - With this method, you determine your costs and add a standard mark up percentage on the cost of the product or service. It has traditionally been a very common method of pricing. However, the key disadvantage is that cost plus pricing does not always give the best price. Both competitor and customer demand factors aren't considered within this pricing method.
2. Breakeven analysis and target profit pricing - The business tries to determine the price at which it will break even or make the target profit it is seeking. For example, if you want to achieve a 20% return on investment, this is added on to the cost of the product to determine the price. The big challenge of course, is to determine break even level at the changing levels of sales. And of course, this method also does not consider either competitors or customer demand.
3. Value based pricing - This method uses buyer's perceptions of value, not the seller's cost as the key to pricing. Pricing variables including customer needs and product position in the market are considered and in turn, this leads to product design or changing product features to satisfy customer needs. The key factor in this method is determining what will a customer is prepared to pay and getting the right combination of good product or service at a fair price.
4. Competition based pricing - Competition pricing can be set at the going rate ie the price is based largely on following competitors prices rather than on company costs or demand. Petrol prices are one example of this. Another example is a business submiting a tender based on what it thinks its competitor will price rather than on its own costs or the demand. Some businesses may take this approach to secure a contract in the knowledge that there may be benefits down stream.

There's no one right way to determine price - that much is clear. In reality, price setting is a combination of all of the above factors ie an accurate assessment of costs, the target rate of return, customers needs and perceived value, along with knowledge of competitive pricing. Broader economic factors also play a key role in determining price. Sales in retail stores are clear evidence of the need to price to meet the market because of current recessionary factors.

So, the price for Tight Design products is now set, but its clear to me that prices will need on going, regular review to measure sales and to determine whether I'm covering costs. Its also  clear that I will not 'set and forget' my pricing strategy.