Jack Grise is a SCORE certified mentor, a Navy veteran, and entrepreneur. In his initial entrepreneurial venture, he developed one of the first automated pharmacy prescription systems in the country. Having spent over ten years in corporate America as Senior Vice President of Sales and Marketing, he then returned to entrepreneurship. He founded a medical dealership and distributorship specializing in MRI related equipment and patient immobilization devices for radiation therapy. He founded the SCORE Pinellas Veteran's Initiative specifically to help aspiring veteran entrepreneurs start, grow, or buy a business.
Mike Lewis is the Chapter Chair, a certified mentor of SCORE in Pasco and Hernando Counties, Florida. He was an entrepreneur in the medical distribution business, and the principal of a sales motivation and training company.
Jack, what do you mean by pricing for profit?
That's an interesting question. Many small businesses we encounter as we go forth with our SCORE efforts are starting a business without much thought about pricing. When you ask them, "How do you price your product or service?" They seem to pull it out of the air. They really don't know what pricing for profit really means.
What it comes down to is that they have to know their costs, both variable and fixed, and can apportion a part of the fixed costs to their overall structure, and then figure out what their pricing needs to be. Then there's a whole host of things that they need to do to make sure that that pricing makes sense. We can talk about all these different issues related to that as we go forward, but pricing for profit, if you just arbitrarily put a price on your product or service and don't know what your costs are, you're really having a hard go at it because you don't know how much money you're making.
Jack, can you go into a little more detail as to what you mean by what is a variable versus a fixed cost?
The easiest way to say that is a fixed cost is typically related to overhead, things like your executive salaries, your rent, your insurance, bank loans that you pay statically every month. Variable costs are those related to whether you're making a product or service, the things that vary on a basis every month. Your number of pieces that you might get, the various things that change. I can't be specific because if you're looking at a service oriented business versus a product oriented manufacturing business, the variations will be quite different. Quite different.
Doesn't the market, and or the competition, actually determine what your pricing should be?
Interesting question. There are many pricing strategies. When we started talking about pricing, I said people typically arbitrarily pick a price that they think the market will bear. One of the ways of calculating what price you should have is called competitive pricing. You get to know your competitor's, and you see what they're pricing their product or service at and you match that in hopes that you'll be able to gain some business. Matching that doesn't mean you can make a profit with that price because the competition may have something on you that you don't know about in the sense that their costs may be significantly lower and hence they have a price. Your costs are higher and you price to match the competition, you end up losing money and you don't know why. It is a form of a pricing strategy, but you need to be careful as to how you arrive at that.
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