Pricing policy has both immediate and long-term consequences on a creative business and has an impact not only on the economics of the enterprise but also on the perception of its products and/or services.
Prices can be derived from costs and this is a useful exercise to do, though it’s not the only way to decide how much to charge. All the direct costs must be included of course, including the cost of labour. More difficult to calculate is a proportion of the indirect costs that should be allocated to products and services – in other words, how much should the sale of each item contribute to the overheads of the business? There is no exact way to do this but there are conventions of management accountancy, which can help. Whatever method you use, income from sales must be sufficient to cover both the direct and indirect costs of producing goods or services.
Distributors and retailers are part of the marketing and pricing equation, so building in an attractive profit margin can help to incentivize such partners to promote your products. Or to put it another way: if the price doesn’t produce a profit for your distributors, they won’t sell your product.
This way of calculating pricing ‘from costs upwards’ is useful for establishing a minimum price, but doesn’t in any way indicate a maximum. We need to take a look at pricing from the other end – in other words from the customers’ point of view rather than the producer’s.
The price customers are willing to pay for a service or product equates much more closely with its value to them rather than what it cost you to create and deliver it. So pricing is about the customer’s perception of value.
Pricing is not just about the economics of the business; it’s also intimately connected with customer perception and the enterprise’s position in the market place.
This way of thinking of value from the customers’ point of view leads to new insights about what in fact the customer is actually buying. Often it’s status, experience, a story, hope, or conspicuous consumption.
Once we fully understand what the customer is buying, we can set the prices accordingly.
Devising a pricing policy is one of the most important decisions creative entrepreneurs make about their businesses. Pricing has significant consequences not only on short-term income but the long-term perception of the business and the goods or services it creates.