Setting prices is challenging. The amount of profit you make depends to a great extent on the prices you charge, so getting the price right is vital to your business success. This section highlights the difference between costs, price and value and how it affects your profit.
2. Costs price and value
One of the biggest decisions you need to make about your business is pricing your products or services. To a great extent, the prices you charge determine the amount of profit you make.
A number of factors influence pricing including:
- what it costs to produce your product or provide your service
- what’s happening in your market
- your competitors’ prices
- the value you provide to your customers
The key is to set a price that, after all your costs have been paid, gives you the maximum profit and provides your customer with the greatest value. Let’s look at what we mean by cost, price, value and profit:
Cost = the total amount you spend to produce, market and supply your product or service
Price = the amount of money you receive for supplying your product or service
Value = what your customer thinks your product or service is worth to them
Profit = what is left when you take away your costs from your sales
Pricing is not just about the numbers. As well as having a clear understanding of your internal costs, you also need to establish the value of your products or services.