Setting Prices Based on Costs: A Mistake

Prices for end customers should be increased according to the perception of value of the product or service, which is not related to production costs.

Monday, August 26, 2013

The myth of the ideal margin
By Ariel Baños
President and founder of FIJACIONDEPRECIOS.COM

The search for the ideal margin is a goal for most companies. However, this reasoning does not help them be more profitable.

"- Ariel, since we are talking about pricing, please tell me: What is the ideal margin that my product should have?"

This is one of the questions I get asked the most often in training courses and consultancy for companies. Everyone is expecting the answer to be something like: "- Look, for your product or in your market, an acceptable gross margin should be not less than: X%".

But nobody is going to hear a response like this from me. Why? Mainly because it is a question focusing in the wrong area: the cost as a starting point. Those who want to find the "perfect margin" believe that from their costs they can calculate sales prices, applying a certain percentage of target return.

This coveted "perfect margin" does not even have fully agreed format. While some calculate it as margin over costs (or "mark-up"), in other cases it is defined as a sales margin, although in both cases there is agreement in that the cost is the starting point.

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