Quotrule Of Thumbquot Is Just A Starting Point

Writen by Larry Galler

In conversation recently, a businessperson asked me whether there was a "rule of thumb" for setting the price for her products. My answer was, "Yes, but that's just the starting point and I feel that using "rule of thumb" for business decisions, especially pricing decisions, means you haven't created a business strategy."

Pricing can be based upon so many variables that using an industry average, standardized mark-up, or astrological chart is the tip of the iceberg in setting prices. A key consideration, and one that is rarely discussed, is the overall strategy of the seller.

What "position in the marketplace" do they have (or want to have)? Some businesses create a prestige, high service position while others create a bargain, low service position. They can both be selling exactly the same product, but their overhead structure, cost of occupancy, cost of amenities, cost of labor, cost of advertising, and cost of customer communications is vastly different and therefore the price they sell their product must be at opposite ends of the pricing spectrum. If both the prestige outlet and the bargain outlet meet their sales volume and profit goals one can conclude that their pricing structure is valid and their customers feel they are getting full value even though their prices might both be considerably different from industry standards or "rule of thumb."

So think of "rule of thumb" as just the starting point of the pricing equation question. Once you have discovered the "range of average prices" for your industry you can begin to develop the added value you bring to that product and modify the price based on your individual situation. If you offer prestige, plush amenities, individualized service, expensive location, extra training, etc. you will have to charge for it. If the buyer wants those added virtues they will pay for it. If you offer a bargain experience your overhead must be much lower or you must sell in higher volume to cover your expenses and still make a profit. Just don't rely on a "rule of thumb" or the competition will cut off that digit.

Larry Galler coaches and consults with high-performance executives, professionals, and small businesses since 1993. He is the writer of the long-running (every Sunday since November 2001) business column, "Front Lines with Larry Galler" Sign up for his free newsletter at http://www.larrygaller.com Questions??? Send an email to larry@larrygaller.com