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Profit Pricing

 

DisciplinesMarketing > Pricing > Profit Pricing

Description | Example | Discussion | See also

 

Description

You can maximize the amount of profit on a product by carefully setting the price.

Draw a price vs. profit graph and set the price for the maximum profit. To do this, use a customer survey to identify their readiness to buy at different price points. At lower prices, you will make little profit. At higher prices, you will sell far fewer, so also will make a limited profit. Somewhere in between will be a price point where the profit will be highest.

If you can separate markets, perhaps using different branding and packaging, you can customize the price for each market, setting it at the best price-profit point. You may even create slightly different variants of the product to optimize the profit for each set of customers.

Be careful with discounting as this can easily erode profit. Discounts can be helpful for selling in bulk, but can reduce the profit so much that little real money is made from the deal.

When you set a price that targets a certain profit, respond intelligently to the facts of how the product actually sells. This can be helped if you can do some pricing tests out in the market to give real data on how customers respond to your prices.

Reduce spending as much as you can. Costs come directly out of profit, and anything you can save will add directly to the money you make on selling.

Example

A marketer has a set of replacement parts for an old product that is not going to be developed further. They decide to 'squeeze' it to get as much profit as possible, cutting advertising and putting up the price so only those who need the product will continue to buy.

A marketer identifies a product as a cash cow that must provide profit to be reinvested in developing new products. They analyze the market and pricing to give a price point that sustains sales while giving sufficient profit to use in other product lines.

Discussion

Profit is the margin on each product, the gap between the sale price and the cost of producing and selling the product. To maximize profit, you hence have to consider both the price and the costs.

Price-profit graphing can be a difficult task as there are many variations to include, from cost allocation to the gap between surveyed customers and eventual customer action. This effectively means you should use such graphing as a guide rather than an absolute decision mechanism. As with other methods, the proof is in the actual sales made and you have to be able to respond to what happens in the real world. 

See also

Competitive Pricing, Discountable Pricing

 

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