Pricing is the most difficult decision that business owner/managers are required to make.

In setting a price your costs, the reactions of customers, the market and competitors need to be assessed. Pricing decisions often need to be made quickly and without testing, but invariably have a direct impact on profit.

Before setting a price identify the target market for the product or service and establish the price range that would be acceptable to potential customers in the market segment. Once you understand your customers, look at your positioning.  Do you want to be the most expensive or the cheapest? You may be surprised to learn that price may not be an issue – value is.  At the same time, research competitor pricing. What are they charging? Finally, consider how much profit you want to make.

There are basically four methods of pricing you may wish to consider that can help put a price on what you sell. These replacement cost, market comparison, discounted cash flow or net present value and value comparison.

The replacement cost is typically a “cost-plus” calculation. Consider how much it would cost to create, add a mark-up and set the price accordingly.

The market comparison is based on the cost of similar products and services. Basically, set your price close to what others are charging.

The discounted cash flow or net present value is used where products or services can produce an on-going cash flow. This method is commonly used when businesses are bought or acquired.

The value comparison is generally the optimal way to price your offer. The price can be set quite high, as the value to a specific group can be high.

Use the first three methods are a baseline but try to discover how valuable you offer is to the customers you hope to sell to.

The choice you make depends on your overall business objective.