The price component of the marketing mix is the determinant as to how much profit is to be made by an entrepreneur. This price determines the profit margin of the business. If the margin is too low, the business is destined for failure. Many small businesses fail because they don’t adequately protect their profit margin.
As entrepreneur we are confident that the products and services we provide our customer are superior to the larger business because we know our customer’s need better than big business. If this is true, the small business owner deserves to receive a fair profit margin. Too many small businesses do not have the necessary confidence to ask for fair prices and end up competing, price-wise, with larger companies. This can be disastrous to their future.
The Purpose of The Price
The price serves numerous functions:
- It should cover the cost of goods, receiving, and shipping.
- It must cover the overhead expenses of the business. Overhead expenses are those that apply to operations (rent, utilities, salaries, insurance, etc.)
- It must pay the owner a fair salary, if he or she works in the business.
- It should pay back the owner(s), over a period of time, any monies invested in the business.
- It should provide enough profit margin to insure a contribution to the long run stability of the business.
- It should act as a marketing tool that attracts a customer seeking a fair exchange for the product or service
If the determined price is not accomplishing all of these functions, it is incorrectly set and will eventually lead to the downfall of the enterprise. Small businesses in competitive markets must protect their profit margin. For example, suggested retail pricing for many retailer would breakdown on average as follow for each dollar sold:
- Revenue = $1.00
- Cost of goods = -0.54
- Gross profit (revenue – cost of goods) = $0.46
- Operating expenses = -0.34
- Net profit (gross profit – operating expenses) = $0.12
For each dollar sold, the owner will receive a 12 cents profit. The $1 price has covered cost of goods and the overhead costs. The net profit must cover the owner’s salary, any principal debt repayment, a contribution to the long run stability of the business (possibly increase inventory or keep as retained earnings for future use), and a repayment on money invested.
Set the price for your long-term growth and stability.
(Source: The McGraw-Hill 36-Hours Course ‘Entrepreneurship’)