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When it’s time to provide pricing for a customer most companies tend to rely almost exclusively on their costs to determine the selling price. But that is a mistake. Sometimes we can make huge margins on certain items and still be competitive. At other times we have to tighten our belts because if we didn’t our selling price would not be in the ballpark; to do otherwise would be foolish from a marketing perspective.

Every day companies around the globe price items too low and too high because they primarily look at the costs when pricing. The fallout from this is lost business from pricing too high and lost dollars from pricing too low. Obviously there must be a floor on gross profit when creating a selling price, but other than that, cost shouldn’t be a significant factor.

The reality is that we need to price according to what the market, and more specifically the customer, will bear. We need to focus on what the final sales price should be, not on the cost in determining a sales price. Our customers don’t know, and probably don’t care, what our profit margins and costs are; they are solely interested in the sales price and this should be your focus too.

Studies show that salespeople frequently have gross profit percentages on their orders that tend to congregate around numbers divisible by five. Now why in the world is that? The reason is the math is faster and they are erroneously focusing only on cost in their calculations. The foolishness of this is that the salesperson is either under pricing and leaving commission dollars on the table or overpricing and jeopardizing the sale - all for the sake of mathematical convenience and a selling price based solely on cost.

Calculating a sales price based on market variables takes more time and effort. If you take the time, you’ll make more money and lose fewer sales.

Tags: pricing

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