Pricing

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*I am forwarding this issue of Dennis of Sunburst Bottle's Newsletter as

I think he says some good stuff in it.

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**Smile*

Chris (list mom)

 

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*Message In A Bottle* - Dennis talks about Pricing.

 

When beginning a business, one of the most critical decisions is pricing

your products. Although I will be talking today about the initial

pricing of your products, this concept holds true for companies that

have been in existence for many years.

 

Pricing is an ongoing issue as costs rise, technology evolves and the

business climate changes. So please pay attention because it’s much

easier to get this correct at first than to “reinvent the wheel” after

finding yourself stuck in a ditch somewhere. In police work we had a

saying “lock and load”. This simply meant that our weapons were loaded

and available to employ if the need were to arise. You can imagine the

possible dire consequences of needing to use your weapon and finding it

not loaded. If your pricing is not “loaded” or correct then a lot of

damage can happen when you have to scramble to correct the error.

 

Hopefully you own a business with the idea of making a profit. There are

many great and worthy not for profit businesses that provide a great

service to the world, but they too need to bring in money to allow them

the opportunity to perform their labors. I have to laugh at those who

hold corporations in great disdain. They seem to think the idea of

making a profit is evil. They refer to corporations as money grabbing

greed mongers. I dare say that without companies generating profits most

people would be without a job. Making a profit of course shouldn’t be

the most important thing in our lives, however without it, many of our

goals or desires would be a hollow dreams. Love, family, companionship,

etc are higher and loftier aspirations, but today we are talking about

business.

 

When we started Sunburst Bottle Company 15 years ago we had very little

overhead. Many of you are currently in the same boat. Our warehouse was

our garage, our office was our family room and we ate our meals on our

conference table, which of course was in our kitchen.

 

Since our home doubled as our business location, we had no office rent.

Our phone system was composed of an extra telephone line that had a

distinctive ring tone. In those days our biggest fear was that one of

our kids would answer the business line. Does that sound familiar to

anyone? Today I wish the kids were around to answer the phone (well

kinda). Even though we worked out of our home, in the early days of the

business, we always tried our best to create a well-run operation.

 

The in-home business provides a landscape whereby pricing can be

relatively simple. Your fixed costs rarely vary and minimal overhead

allows you great ease when determining your pricing.

 

Let’s now examine the components that determine your pricing structure.

Before you can seriously consider the price of your product you need to

look at all of your costs. As your business grows, these costs will

increase. Today our overhead costs are much higher than they were when

we began the business. Some of these costs are: employees, insurance,

warehouse, equipment, utilities, shipping, additional taxes, local fees,

etc. Now we have a large stock of inventory that would have been

virtually impossible before we moved into our large new warehouse. You

could make a large profit on your product but actually lose money

because you failed to take into account your total operating costs.

 

I know how much our company needs to make every day in order for us to

be profitable. I suggest that if you don’t know much you need to make

every day to keep your doors open, you are swimming in dangerous waters.

The sooner you get a firm handle on this the better off you will be.

Also keep in mind that if you are working out of your home and plan to

move into a more expensive office, you may have to increase your prices.

 

Determining a price on a product without knowing all of your costs is

like walking into a clothes store and grabbing a pair of pants on the

first rack you see and hope the pants fit. When you get home and try on

the pants they may be too small, too large, too short or too long. For

the pants to fit comfortably you either have to lose weight, gain

weight, grow taller or shrink. Obviously it’s much easier to try the

pants on before purchasing them. Pricing is no different. The pricing

has to be determined correctly or the fit will be uncomfortable.

 

Some companies have the luxury of purchasing what is called “just in

time inventory”. This means they can order the product from their vendor

after a customer has bought the product from them. This is great if the

item can be delivered to the customer in a timely manner. If you are

like us, you need to stock or perhaps even manufacture your products. If

this is the case then there is an inventory or stocking cost that you

have to take into consideration. These costs need to be accounted for

and passed along to your customer.

 

Competition plays a role in your pricing but should only be one of many

considerations. I used to concern myself with the pricing of companies

that sell comparable products. I learned that price does not equate to

value, customer service, etc. The “bottom feeder” may not be the type of

customer you want. If you acquire a customer solely because of price you

can rest assured this customer will be gone as soon as they find a

cheaper price. They are looking only for price. For example, if you sell

an essential oil for $10.00 an oz and someone else sells oil with “the

same name” for $8.00 an oz – the “bottom feeder” will quickly change

rivers and buy from your competitor. It doesn’t matter if the other oil

has been greatly diluted, is distilled from an inferior plant, and the

shelf life has expired. This type of customer is interested only in price.

 

You need to build value in your name and your products. Once the value

of your products and your company reputation is established, you should

have plenty of customers as long as your prices are reasonable.

 

There is more that I could write on this topic but the constraint of

space in this newsletter doesn’t allow that. Value plays a large role in

your pricing equation which will be addressed in a future newsletter.

 

What started out to be an easy exercise really is a cursory examination

of but a few of the considerations of determining product pricing.

Hopefully this will help examine the pricing puzzle. It’s much like a

good exercise program. As soon as you quit exercising you realize that

you made a mistake. It’s much easier to remain on a good program than to

try to fix the damage.

 

In summary, some of the major components of a pricing structure are:

 

- Product cost

- Overhead (rent, utilities, employees, office supplies, etc)

- Competition

- Desired profit margin

- Value you provide for the customer

 

*Until the next* Message In a Bottle …..

 

….. here’s to your success

 

Dennis Gibson

President/CEO

Sunburst Bottle Company

916 929-4500

www.sunburstbottle.com <http://www.sunburstbottle.com/>