PRICING YOUR PRODUCTS & SERVICES                    8/96

Pricing goods and services - it may be the most difficult task in
the business arena.

It's generally agreed that the primary goal of business is to make
a profit. But many small businesses fail to master this objective
simply because they don't consider all the factors necessary to
make prices competitive and yield that elusive profit.

Before setting prices, you must understand your market,
distribution costs and competition. Remember, the marketplace
responds rapidly to technological advances and international
competition. You must keep abreast of the factors that affect
pricing and be ready to adjust quickly.

There are several pricing strategies; select the approach that will
make your goods or services the most competitive and will help you
reach your profit goals.

Retail Cost and Pricing

A common pricing practice among small businesses is to follow the
manufacturer's suggested retail price. The suggested retail price
is easy to use, but it does have one major shortcoming - it doesn't
adequately account for the element of competition.

Competitive Position

An alternative is to base your price on those of your competitors.
A small retailer, for example, should compare prices with a store
that's comparable in size and customer volume. It's very chancy to
compete with a large store's prices, because they can buy in
larger volume and their cost per unit will be less. Instead, price
products based on your local small-store analysis, then highlight
other competitive factors, like personalized customer service and
convenient location. There are any number of factors that influence
a consumer's decision to buy from a certain business, including
price, convenience, and courteous and attentive service.

Pricing Below Competition

Some vendors have been very successful pricing their goods or
services below the competition. Since this strategy reduces the
profit margin per sale, it requires a company to reduce its costs
and -

*  obtain the best prices possible for merchandise,
*  locate the business in an inexpensive location or facility,
*  closely control inventory,
*  limit the lines to fast-moving items,
*  design advertising to concentrate on price specials, and
*  limit other services.


One word of caution: pricing goods below the competition can be
difficult to sustain. Why? Because every cost component must be
constantly monitored and adjusted. It also exposes a business to
pricing wars. Competitors can match the lower price, leaving both
parties out in the cold.

Pricing Above Competition

This strategy is possible when price is not the customer's
greatest concern. Considerations important enough for customers
to justify paying higher prices include -

*  service considerations, including delivery, speed of
   service, satisfaction in handling customer complaints, knowledge
   of product or service, and helpful, friendly employees;
*  a convenient or exclusive location; and
*  exclusive merchandise.

Price Lining

This strategy targets a precise segment of the buying public by
carrying products only in a specific price range. For example,
a store may wish to attract customers willing to pay over $50 for a
purse. Price lining has certain advantages:

*  ease of selection for customers;
*  reduced inventory; and
*  reduced storage costs, due to smaller inventory.

Multiple Pricing

This approach involves selling a number of units for a single
price - for example, two items for $1.98. This is useful for
low-cost consumable products, such as shampoo or toothpaste. Many
stores find this an attractive pricing strategy for sales and
year-end clearances.

Cost Factors and Pricing

Every component of a service or product has a different, specific
cost. Many small firms fail to analyze each component of their
commodity's total cost, and therefore fail to price profitably.
Once this analysis is done, prices can be set to maximize profits
and eliminate any unprofitable service.

Cost components include material, labor and overhead costs.

*  Material Costs are the costs of all materials found in the
   final product. For example, the wood, glue and other materials
   used in the manufacturing of a chair are direct materials.
*  Labor Costs are the costs of the work that goes into the
   manufacturing of a product. An example would be the wages of all
   production-line workers producing a certain commodity. The direct
   labor costs are derived by multiplying the cost of labor per hour
   by the number of personnel-hours needed to complete the job.
   Remember to use not only the hourly wage but also the dollar
   value of fringe benefits. These include social security, workers'
   compensation, unemployment compensation, insurance, retirement
   benefits, etc.
*  Overhead Costs are any costs not readily identifiable with a
   particular product. These costs include indirect materials, such
   as supplies, heat and light, depreciation, taxes, rent,
   advertising, transportation and insurance. Overhead costs also
   cover indirect labor costs, such as clerical, legal and
   janitorial services. Be sure to include shipping, handling and/or
   storage as well as other cost components.

Part of the overhead costs must be allocated to each service
performed or product produced. The overhead rate can be expressed
as a percentage or an hourly rate.

It is also important to adjust your overhead costs annually. Charges
must be revised to reflect inflation and higher benefit rates.

It's best to project the costs semiannually, including increased
executive salaries and other projected costs.

Figuring Costs and Profits for a Consultant Service

As a consultant, you will most likely price your services by the
hour. Remember to charge for an adequate number of hours. Travel
time is usually listed as an extra charge.

It's unlikely that all your time will be billed to clients. There-
fore, hourly or contract fees must be set high enough to cover
expenses during slow periods. That is why one-half of the total
normal working hours for a given year are used in figuring overhead
rates. Try to obtain long-term, monthly or contract assignments
when possible.

Summary

Your pricing structure and policy are major components of your
public image and are crucial to securing and keeping your
clientele.

Pricing for service businesses may be more complex than retail
pricing. The equation, however, is the same:

  cost + operating expenses + desired profit = price.

The key to success is to have a well-planned strategy. Establish
your policies and constantly monitor prices and operating costs
to insure profit. Accuracy increases profits!



For More Information

Information is power. Make it your business to know what is
available, where to get it and, most importantly, how to use it.
Sources of information include:

U.S. Small Business Administration

*  SBA District Offices
*  Small Business Development Centers (SBDCs)
*  Service Corps of Retired Executives (SCORE)
*  SBA OnLine (electronic bulletin board)
*  Business Information Centers (BICs)

The SBA has offices located throughout the United States. For the
one nearest you, look under "U.S. Government" in your telephone
directory, or call the SBA Answer Desk at (800) 8-ASK-SBA. To
send a fax to the SBA, dial (202) 205-7064. For the hearing
impaired, the TDD number is (704) 344-6640.

To access the agency's electronic public information services,
you may call the following:

     SBA OnLine: electronic bulletin board - modem and computer
                 required
          (800) 697-4636 (limited access)
          (900) 463-4636 (full access)
          (202) 401-9600 (D.C. metro area)
     Internet: using uniform resource locators (URLs)
          SBA Home Page: http://www.sba.gov
          SBA gopher: gopher://gopher.sba.gov
          File transfer protocol: ftp://ftp.sba.gov
          Telnet: telnet://sbaonline.sba.gov
          U.S. Business Advisor: http://www.business.gov

You also may request a free copy of The Resource Directory for
Small Business Management, a listing of for-sale publications and
videotapes, from your local SBA office or the SBA Answer Desk.

Other Sources

*  State economic development agencies
*  Chambers of commerce
*  Local colleges and universities
*  Libraries
*  Manufacturers and suppliers of small business products and
   services
*  Small business or industry trade associations

All of the SBA's programs and services are provided to the public
on a nondiscriminatory basis.

FS0060 (8/96)

----------
End of Document