As a guerrilla, you know that setting prices for products and services is one of your most important and challenging responsibilities. In order to prosper you must find the middle ground between the price your target market is willing to pay and one that produces a profit for your company. When establishing pricing, you must consider your costs, the effects of competition, as well as the customer's perception of value.

Let's define cost as the sum total of the fixed and variable expenses to manufacture or offer your product or service Every business has both fixed and variable expenses. Fixed costs include rent, utilities, office equipment, insurance, executive salaries, depreciation, and property taxes. Variable costs are expenses that vary with the amount of goods produced or service provided. They include the cost of raw materials, hourly wages paid to laborers and contractors, warehouse and shipping costs, and sales commissions. Variable costs can also comprise advertising and promotion expenses. By adding your fixed and variable expenses to the per unit profit you desire, you'll arrive at your cost to offer your product or service. This cost is your floor.

In order to stay in business, you must set prices above the floor. (Prices may temporarily be set below the floor for a product introduction.) Your ceiling is the customer's perceived value. In other words, the maximum price customers will pay based upon what the product is worth to them. Perceived value is a mixture of an established reputation, marketing mix, packaging, competitive atmosphere, etc.

The best price for your product lies between the floor and the ceiling. It is important to be aware of costs in establishing prices, but not to get stuck offering only cost-based pricing. Value-based pricing encourages you to evaluate your product and its' price from the customer's perspective.

The Break-Even Point

Whatever your pricing strategy, it's crucial to know the break-even point. Begin by adding up all fixed costs and determine what your variable costs are at different production volumes. After you've determined your break-even points which establish "floors" for your price, there are strategies for establishing pricing based upon additional financial objectives. These include setting a high price to make high profits initially, and setting prices to meet a desired profit goal.

Value-Based Pricing

If you understand the customer's perception of the value of your product or service, you'll be less likely to price it out of the market. Access customers' individual preferences and their perception of product features and benefits, convenience, quality, company image, and competitive products.

To determine customers' individual preferences, ask yourself the following questions:

- Do my customers save time or money by purchasing my product or service?

- How would they describe what they get for their money?

- Is it more convenient to use my service rather than trying to do it themselves?

- Do they gain a competitive advantage from using my service?

- Who are my competitors and how much do they charge?

With this information, you can determine the maximum price the customer will pay for the benefit received. Next week we'll explore promotional and discount pricing strategies.