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Pricing: Cost and Value

Someone once made the observation that pricing is two-thirds marketing and one-third financial. This statement goes against the grain of common sense, which suggests that nothing could be more financial than price. But if your pricing isn’t right, your marketing plan, no matter how well crafted, won’t get off the ground. Prices too high? Your product won’t sell. Prices too low? Your product may sell, but your company won’t be profitable. The price, as the television game show proclaims, must be right.

To properly understand the role of pricing, you must first understand margin. Margin is the difference between how much it costs you to produce your product or service and how much you can sell it for. If your widget costs your company $2 to manufacture, for instance, and you sell it for $3, your margin is $1. Presented in terms of percentages, if you make a profit of $1 on each $3 sale, your margin is 33 percent ($1 divided by $3).


  

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