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Pricing policy has both immediate and long-term consequences on a creative business
and has an impact not only on the economics of the enterprise but also on
the perception of its products and/or services.
Prices can be derived from costs and this is a useful exercise to do, though it’s
not the only way to decide how much to charge. All the direct costs must
be included of course, including the cost of labour. More difficult to
calculate is a proportion of the indirect costs that should be allocated
to products and services - in other words, how much should the sale of
each item contribute to the overheads of the business? There is no exact
way to do this but there are conventions of management accountancy, which
can help. Whatever method you use, income from sales must
be sufficient to cover both the direct and indirect costs of producing
goods or services.
Distributors and retailers are part of the marketing and pricing equation, so building
in an attractive profit margin can help to incentivise such partners to
promote your products. Or to put it another way: if the price doesn’t
produce a profit for your distributors, they won’t sell your product.
This way of calculating pricing ‘from costs upwards’ is useful for establishing
a minimum price, but doesn’t in any way indicate a maximum. We need to
take a look at pricing from the other end – in other words from the
customers’ point of view rather than the producer’s.
The price customers are willing to pay for a service or product equates much
more closely with its value to them rather than what it cost you to create
and deliver it. So pricing is about the customer’s perception of value.
Pricing is not just about the economics of the business; it’s also intimately
connected with customer perception and the enterprise’s position in the
This way of thinking of value from the customers’ point of view leads to new
insights about what in fact the customer is actually buying. Often it’s
status, experience, a story, hope, or conspicuous consumption.
Once we fully understand what the customer is buying, we can set the prices
Devising a pricing policy is one of the most important decisions creative
entrepreneurs make about their businesses. Pricing has significant consequences
not only on short-term income but the long-term perception of the business
and the goods or services it creates.
This article was originally published on the T-Shirts and Suits blog.