How much should I charge for this product

This is far too expensive

Many times I hear people discussing pricing using words like super profits, rip-off and highway robbery. They usually say something in the line of “I understand the need to make a profit but this is ridiculous”. I get a similar question from many clients i.e. what would be a fair amount of profit to earn on a sale. I think its all dependent on what the customer would be willing to pay, its that simple.

Now I don’t really want to get involved in a long theoretical discussion on pricing theory and human psychology, my experience is based on being a buyer and seller in various industries and with various products and that experience suggests that the market or buyers sets the price.

If I’m selling baked beans, my customers are not very interested in the fact that my boiler exploded and the last batch cost me double to produce, they have an idea of what the item should cost and are willing to pay that price. My customer’s perception of value sets the price they are willing to pay.

The only way that I know to move the selling price is to change this perception of value and for my baked beans example I could:

Your Response	Customer Benefit
Package in a resealable pouch	Easy to open, easy to store
Add in extra sauce	A complete meal
Now without any sauce	Easy to add to any dish
With chilli sauce	Exciting new flavour

If the customers see an additional benefit there is potentially room to move the price.

A further example of this is organic products. A well run organic farm should not have a higher cost to produce than those using the traditional farming methods. Some anecdotal evidence suggests that certain organic producers are even achieving lower costs than those using traditional methods.

The cost to get one organic tomato to market is not higher than a traditionally farmed tomato because the lower yields are easily offset by savings in fertilisers, hormones and insecticides. However, these organic products achieve better retail prices because of this perception of value, the customers are willing to pay extra because it is seen as a premium product, as giving an additional health benefit to the consumer

In short, the price that sellers achieve is more based on the buyers perception of value than the cost to produce the item. So is there any reason to still do costing in a business, are cost accountants sitting without work and can Activity Based Costing really add any value to your business. My answer is a definite Yes. Because the market sets the price for my product, I need to know my costs to bring it to market. The difference between the two is my margin and indicates whether the product is viable.