Thinking about Costs when Setting Prices

November 2017

Hello from Florida!

I've had a busy month, but the show must go on. This month's pricing newsletter should prove to be the best in a long time.

Of course, it's also the first in a long time too...

Pricing Question from a Reader

I keep hearing that costs don't matter when setting prices, but is that really true? Why would anyone set his prices below his costs?

You've gotten some advice that's almost right - but not quite.

It's not that you should ignore all costs when thinking about pricing. It's just that you should ignore sunk costs (the money that you've spent or committed) like buildings, equipment, and general startup costs.

Spending more money in the past won't give you permission to charge more in the future. Sure, the effects of big spending - higher quality, improved functionality, or better materials might allow you to earn more, but merely spending won't.

Your customers won't be thinking about how much you're spending when deciding whether or not to buy your products.

That said, you do need to think about future costs - particularly the marginal costs (cost of creating each item that you sell).

If the cost of creating a product is above the income that you'll receive from selling it, you'll be best served ceasing business immediately - unless you have some strategic reason to continue, or expect market conditions to change in the future.

While losing money on each sale won't let you charge more, it may tell you that you should reconsider your business approach.

Questions come from readers like you. If you'd like your questions answered, send them my way.

♫This Q&A and many others are now available on the Pricing After Dark podcast.

Pricing in the News

From the Blog Archives

Notable Pricing Quote

"If you are determined enough and willing to pay the price, you can get it done." -- Mike Ditka

Shameless Commercial Plug

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No, not Ghostbusters!

Contact me instead.