The Price Is Right: Knowing How Much to Charge
In This Chapter
Understanding the importance of product differentiation
Addressing absorption costing
Using cost-plus pricing
Taking risks with variable-cost pricing
Aiming for target costing
Have you ever seen the game show The Price Is Right? The host challenges contestants to guess the prices of different pieces of merchandise. Guessing the right price can win you cash and all sorts of valuable prizes. Even if you get the price wrong, you still walk away with your novelty nametag and maybe a chance to spin a giant wheel.
The stakes get a lot higher when you’re naming prices in the real business world. Prices that are too high will scare away customers. Too low, and losses may wipe out your business. Prices must be low enough to lure customers but high enough to cover your costs and help you earn a profit. Therefore, before setting a price, you must understand both market forces and the cost structure of your business.