Wednesday, November 08, 2006

The profits in the Percentages

Ok, we have all heard the saying "it's the one percenters that make the difference"... Well as true as it is, it's not what I am talking about here.

I am talking about how percentages affect the pricing of your product. In my book
'How To Turn Your Million Dollar Idea Into A Reality' I spend a lot of time talking about pricing and how to calculate a price for your product that will give you the maximum amount of overall profit.

I would like to expand on this topic today and throw another theory I have developed into the mix - 'The Theory of Pricing Percentage'

This 'theory' is designed to help you effectively price your product to ensure that the maximum number of 'customers' in your target market can buy your product. See, most entrepreneurs take a very egocentric approach to pricing - they either develop a pricing stucture based on
  • the costs required to supply the product
  • the gross profit they wish to make per sale
  • or a combination of the two

'The Theory of Pricing Percentage' however states "It's not how much you sell your product for, it's what percentage of your target's disposable income it costs them"

In other words; you should set your pricing based on what your customers can afford in terms of their disposable income.

For example, if you are selling 'widgets' that your target market purchase on a weekly basis you should consider setting the price as a percentage of their weekly disposable income. If your target markets weekly disposable income is, say $400 - a charge of 2% would be a cost of $8. Where as if your target market has a disposable income of $900 per week you could sell to them for $18 (the same 2%).

Charging them 2%, results in the same 'pain cost' to the consumer, and in theory the same level of inertia to overcome.

Now when I say 2% I am not saying make the price tag say 2% of your disposable income and make them bring in a pay check to calculate the costs; what I am saying is do some research and work out approx what 2% of your typical cutomers disposable income would be and charge that flat price.


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