Which of the following factors should be considered when determining an acceptable sales price

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Your customer needs to find that your price falls within their range of what’s acceptable, and your ability to price is constrained by your costs.

In the chart below, the floor of your pricing is your total costs for what you’re selling. The ceiling, or highest price, is the number at which your customer values your offer. Above this price, you lose the sale because the customer feels that your price exceeds the value he or she gets from your offer.

Between the floor and ceiling sits a price your customer will find acceptable.

Price floor and price ceiling

Source: Eric Dolansky

To choose the right price within your customer’s acceptable range, consider the main factors that affect price:

• operating costs
• scarcity or abundance of inventory
• shipping costs
• fluctuations in demand
• your competitive advantage
• perception of your price

Choosing the right pricing strategy

1. Cost-plus pricing

Many businesspeople and consumers think that cost-plus pricing, or mark-up pricing, is the only way to price. This strategy brings together all the contributing costs for the unit to be sold, with a fixed percentage added onto the subtotal.

Dolansky points to the simplicity of cost-plus pricing: “You make one decision: How big do I want this margin to be?”

The advantages and disadvantages of cost-plus pricing

Retailers, manufacturers, restaurants, distributors and other intermediaries often find cost-plus pricing to be a simple, time-saving way to price.

Let’s say you own a hardware store offering a large number of items. It would not be an effective use of your time to analyze the value to the consumer of each nut, bolt and washer.

Ignore that 80% of your inventory and instead look to the value of the 20% that really contributes to the bottom line, which may be items like power tools or air compressors. Analyzing their value and prices becomes a more worthwhile exercise.

The major drawback of cost-plus pricing is that the customer is not taken into consideration. For example, if you’re selling insect-repellent products, one bug-filled summer can trigger huge demands and retail stockouts. As a producer of such products, you can stick to your usual cost-plus pricing and lose out on potential profits or you can price your goods based on how customers value your product.

2. Competitive pricing

“If I’m selling a product that’s similar to others, like peanut butter or shampoo,” says Dolansky, “part of my job is making sure I know what the competitors are doing, price-wise, and making any necessary adjustments.”

That’s competitive pricing strategy in a nutshell.

You can take one of three approaches with competitive pricing strategy:

Co-operative pricing

In co-operative pricing, you match what your competitor is doing. A competitor’s one-dollar increase leads you to hike your price by a dollar. Their two-dollar price cut leads to the same on your part. By doing this, you’re maintaining the status quo.

Co-operative pricing is similar to the way gas stations price their products for example.

The weakness with this approach, Dolansky says, “is that it leaves you vulnerable to not making optimal decisions for yourself because you’re too focused on what others are doing.”

Aggressive pricing

“In an aggressive stance, you’re saying ‘If you raise your price, I’ll keep mine the same,’” says Dolansky. “And if you lower your price, I’m going to lower mine by more. You’re trying to increase the distance between you and your competitor. You’re saying that whatever the other one does, they better not mess with your prices or it will get a whole lot worse for them.”

Clearly, this approach is not for everybody. A business that’s pricing aggressively needs to be flying above the competition, with healthy margins it can cut into.

The most likely trend for this strategy is a progressive lowering of prices. But if sales volume dips, the company risks running into financial trouble.

Dismissive pricing

If you lead your market and are selling a premium product or service, a dismissive pricing approach may be an option.

In such an approach, you price as you wish and do not react to what your competitors are doing. In fact, ignoring them can increase the size of the protective moat around your market leadership.

Is this approach sustainable? It is, if you’re confident that you understand your customer well, that your pricing reflects the value and that the information on which you base these beliefs is sound.

On the flip side, this confidence may be misplaced, which is dismissive pricing’s Achilles’ heel. By ignoring competitors, you may be vulnerable to surprises in the market.

3. Price skimming

Companies use price skimming when they are introducing innovative new products that have no competition. They charge a high price at first, then lower it over time.

Think of televisions. A manufacturer that launches a new type of television can set a high price to tap into a market of tech enthusiasts (early adopters). The high price helps the business recoup some of its development costs.

Then, as the early-adopter market becomes saturated and sales dip, the manufacturer lowers the price to reach a more price-sensitive segment of the market.

Dolansky says the manufacturer is “betting that the product will be desired in the marketplace long enough for the business to execute its skimming strategy.” This bet may or may not pay off.

Risks of price skimming

Over time, the manufacturer risks the entry of copycat products introduced at a lower price. These competitors can rob all sales potential of the tail-end of the skimming strategy.

There is another earlier risk, at the product launch. It’s there that the manufacturer needs to demonstrate the value of the high-priced “hot new thing” to early adopters. That kind of success is not a given.

If your business markets a follow-up product to the television, you may not be able to capitalize on a skimming strategy. That’s because the innovative manufacturer has already tapped the sales potential of the early adopters.

4. Penetration pricing

“Penetration pricing makes sense when you’re setting a low price early on to quickly build a large customer base,” says Dolansky.

For example, in a market with numerous similar products and customers sensitive to price, a significantly lower price can make your product stand out. You can motivate customers to switch brands and build demand for your product. As a result, that increase in sales volume may bring economies of scale and reduce your unit cost.

A company may instead decide to use penetration pricing to establish a technology standard. Some video console makers (e.g., Nintendo, PlayStation, and Xbox) took this approach, offering low prices for their machines, Dolansky says, “because most of the money they made was not from the console, but from the games.”

A comparative market analysis (CMA) is an estimate of a home's value based on recently sold, similar properties in the immediate area. Real estate agents and brokers create CMA reports to help sellers set listing prices for their homes and, less commonly, to help buyers make competitive offers. Individuals can perform their own comparative market analysis by researching comparable properties (known as "comps") on real estate listing sites, such as realtor.com.

• A comparative market analysis (CMA) is an estimate of a home's value used to help sellers set listing prices, and to help buyers make competitive offers.
• The analysis considers the location, age, size, construction, style, condition, and other factors for the subject property and comparables.
• If you're a buyer or seller interested in a CMA for a specific property, ask a local real estate agent or broker for help, or do your own research by comparing homes online.

A comparative market analysis helps sellers choose the best listing prices for their homes. The "best" price is the one that's not so low it leaves money on the table, and not so high that the home doesn't sell at all. For buyers, a CMA can verify if a home is a good deal and help pinpoint a competitive offer that will be taken seriously—without going overboard.

A CMA compares a subject property to other homes that are similar in location, size, and features. Ideally, a CMA uses recently sold homes from the same subdivision as the subject property. Of course, finding homes that sold within the last three to six months in the immediate area can be difficult if you're in a cool real estate market or a rural setting. In these cases, a formal appraisal might be a better option.

Note that while a comparative market analysis is like an informal appraisal, real estate agents and brokers don't always need an appraiser's license to perform a CMA while serving buyers and sellers. Still, some states will hold real estate agents and brokers responsible if they don't perform a CMA in a competent manner. If this happens, the agent will have to answer to the state's real estate licensing commission and risk disciplinary action.

When a real estate agent or broker conducts a comparative market analysis, they will create a report that details the findings. While there's no standardized CMA report, it will typically include:

• The address of the subject property and three to five comparables
• A description of each property, including elevation, floor plan, and the number of bedrooms and bathrooms
• The square footage of each property
• The sales price of each comp
• Dollar adjustments for any differences
• The adjusted sold price per square foot of each comp
• The fair market value of the subject property

Many real estate agents and brokers use software to generate comprehensive (and professional-looking) CMA reports. If you plan to create your own, use a spreadsheet to keep track of your research or try an online home-price tool offered by one of the real estate listing websites. Below is an example of a CMA report.

A CMA involves much more than just comparing the prices of recently sold homes in the area. Here's a rundown of the basic steps for creating an accurate CMA:

To set the right listing price—or ensure a home you're interested in is a good deal—the CMA should take into consideration the general quality of the neighborhood. Where are the more attractive blocks? How close are community amenities? How close are community nuisances? What are the HOA rules? How are the schools? Are there any issues with curb appeal?

If a real estate agent or broker does the CMA, they will review the existing listing (if there is one) and make an in-person visit to gather information about the subject home. They'll take note of the home's size (particularly the liveable space), age, style, construction, condition, layout, finishes, landscaping, and upgrades and updates. 

Find three to five comparable homes in the area that have sold recently and that are as close to the subject home as possible. Ideally, the comps will be within one mile of the subject property and in the same school district. Focus on homes that are like the subject home in terms of square footage, lot size, bedrooms, bathrooms, and type of construction. Pay close attention to when the comparable property sold: The more recent, the better because real estate prices can fluctuate rapidly. If the home has a unique location—such as overlooking a golf course or the waterfront—the comps should have the same placement.

The next step is to adjust for differences between the subject home and each comparable property. An experienced real estate agent or broker will be able to assign a dollar value to each of the differences and adjust the value of each comp accordingly. It may seem counter-intuitive, but if the comp has a feature that's inferior to the subject home, a positive adjustment is made to the value of the comp, and vice versa. As an example, if a comp has an extra bedroom (superior feature) it is reasonable to assume that the buyer paid more to get the extra bedroom. In this case, you would deduct an amount from the comp to account for the extra bedroom, thereby allowing for an apples-to-apples comparison. The value of the target home is never adjusted.

After adjusting for differences, divide the adjusted price of each comp by its square footage to determine the sold price per square foot. Next, add together the sold price per square foot of all the comps, and divide by the number of comps to get the average. Finally, multiply this average by the square feet of the subject property to find its current market value.

In general, the best comps are the ones that are the most similar to the subject home, the more recently sold, and the ones with the fewest adjustments required. The final price might need to be tweaked slightly, depending on the market. For example, if the market is hot or if inventory is low, the price might be slightly higher. Conversely, if there are a lot of similar homes on the market, the price might have to come down to be competitive.