Thinking about Costs when Setting Prices
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
- This Company Added the Word 'Blockchain' to Its Name and Saw Its Shares Surge 394% - If you were old enough to experience the dot com craze in the late 1990s, you'll remember how every company tried to describe itself as a tech company. Why? Because doing so raised their share prices.
- Lumber lawsuit against Menards dismissed; judge says retailer didn't lie about its 4x4s - The meaning of the word "fraud" seems to be changing over time. It's getting to the point at which product descriptions can no longer be trusted.
- Best Buy Says iPhone X Costs $100 Extra at Full Price Because Flexibility Sometimes 'Has a Cost' - Sometimes a "Best Buy" might actually be a "Worst Buy."
From the Blog Archives
- The Price of Insurance Against Lethal Coconuts: What You Need To Know - Did you know coconuts kill more people than sharks? So why can I buy shark insurance but not coconut insurance?
Notable Pricing Quote
"If you are determined enough and willing to pay the price, you can get it done." -- Mike Ditka
Shameless Commercial Plug
If you'd like to improve the pricing and positioning of your business, you know whom to call, right?
No, not Ghostbusters!
Contact me instead.