This article will explain the importance of getting your product pricing strategy correct so that your business will make the money you deserve. It will also explain how to make your price sell.

As a business consultant I was once called into a business that had its product pricing strategy so wrong that it could not make any money.

The business was family owned run by two sons of the founder. The founder's wife was Chairman but the management of the business was down to the sons. It was a nice business that was capital intensive and there was a great amount invested in plant and machinery.

The products were plastic mouldings that were run off in good volumes but with inadequate margins so the business was only breaking even and was running its overdraft right up to the agreed limit.

The reason that the business was not making money was that the sons had been using a product pricing formula that failed to recognise market competition and was based on only a mathematical calculation based on material and labour costs, overhead recovery, and profit as a percentage. It took no account of machinery usage and product volumes.

This was a rescue mission because the bank was pressing for elimination of the overdraft. With little time to spare a quick analysis revealed what were the loss making products. Which products were under priced against the competition and how stock levels were controlled against demand.

With this data it was possible to

* Cease production of certain loss making products.

* Develop a product, marketing and pricing strategy for the remaining products so that prices could be increased to match the competition.

* Start controlling stocks to reduce work in progress, which freed up money tied up in stock thus reducing the overdraft.

The results were staggering.

In a matter of months the overdraft was eliminated and the bank continued to support the business. The product volumes grew because the perception was that the products were not inferior. The business started turning a profit so there was money to invest for future development.

All this came about by devising and implementing a correct product pricing strategy. If they had continued with the incorrect product pricing the business would have ultimately failed.

So it's vitally important you get your product pricing strategy right if you want to make and continue making money.

Be careful not to price yourself out of the market.

Best wishes,

Michael Harrison.

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