How to Know If the Price Is Right

Pricing is seldom given proper attention ["Is It Time to Raise Prices? June]. Alison Stein Wellner's in-depth look at the psychology of pricing and the idea of price reference points is an extremely valuable resource for any business. One other area of pricing analysis that I think should be highlighted is price elasticity. Business owners should study and analyze the price elasticity of their products or services and use that research in their pricing strategies. For example, if a 20% price increase will result in a 5% loss of sales, the result will be a 14% revenue boost. In that case, a price increase is probably a good idea.

Rick Ersland, president and CEO, Ersland Touch Landscape, Phoenix

Another thing to keep in mind when setting prices is that your product cost should reflect both the soft and the hard expenses it generates. I'm an entrepreneur in the retail and import home furnishing business. Suppose my supplier charges me $1,000 for a custom-made ironwood table. Freight costs might be another 20%, so let's say the final cost is $1,200. If I mark it up two times to $2,400, it would appear that my gross margin is 50%.

However, to get a custom table made, I may also incur an additional $300 in labor for inspections and touchups. Typically, that $300 would be lumped in with normal monthly expenses. But if I consider that $300 as part of the product cost, my gross margin is 37.5% instead of the 50% I was shooting for.

Toby Danylchuk
President, ITZA Galerias
San Diego

I see many companies pulling prices out of the air, only to reflexively discount them during negotiations. This frequently leads to prices that are too low and the challenge of raising them, which is much harder than setting the right price in the first place.

That said, right doesn't necessarily mean higher. Entrepreneurs often go all out to satisfy customers with last-minute orders, rush delivery, and other costly efforts. They expect to be paid for these services, and they should be. But many customers would like a less expensive offering that strips out the extras. In my opinion, the best strategy is to target the high, middle, and low segments of the price spectrum.

Reuben Swartz
President, Mimiran
Austin

Government Games

I was sorry to read about Norm Brodsky's experience with the NYC2012 initiative ["Let the Political Games Begin, June]. As a business owner in lower Manhattan, I know how hard it is to deal with the city government. My business is still suffering because of 9/11 bureaucracy. After reading Michael Porter's take on the difficulty inner city businesses have with unresponsive city governments ["More Tales of the Inner City, June], I got an idea. Maybe the Initiative for a Competitive Inner City should do a study on how the Olympics would affect inner city businesses.

Donna Childs
CEO, Childs Capital
New York City

Norm Brodsky's column about his effort to keep his company's land from becoming a site for the Olympics should be required reading in business school. It's Real World 101. I like the way he handled Jay Kriegel, executive director of NYC2012. If it pays off for Brodsky in the future, and I hope it does, it will be another feather in his headband.

Ken Aclin
Owner, Allied Sales & Distribution
Shreveport, La.

Don't Forget the Dot-com

In selecting a new name for its company, Momentum Marketing missed an opportunity to choose one with a clean Web address [Case Study, June]. After I read that Momentum had changed its name to Red Peg, I went to redpeg.com. Turns out it's someone's personal blog.

Sure, redpegmarketing.com gets you to the company's new site, but Momentum spent two years on its name change. It could have found one with a clean Web address.

Paul Noble
Founder and CEO, Imtech
Denville, N.J.

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Published on: Aug 1, 2005