Intelligent pricing is one of the most important elements of any successful business venture. Yet many entrepreneurs fail to educate themselves adequately about various pricing components and strategies before launching a new business. Smart small business owners will weigh many marketplace factors before setting prices for their goods and services. As the Small Business Administration (SBA) indicated in The Facts About Pricing Your Products and Services, "you must understand your market, distribution costs, and competition. Remember, the marketplace responds rapidly to technological advances and international competition. You must keep abreast of the factors that affect pricing and be ready to adjust quickly."

Cost Factors and Pricing

There are three primary cost factors that need to be considered by small businesses when determining the prices that they charge for their goods or services. After all, price alone means little if it is not figured within the context of operating costs. A company may be able to command a hefty price for an item, only to find that the various costs of producing and delivering that item eliminate most or all of the profit that it realizes on the sale. It should also be noted that service businesses often find it more difficult to accurately gauge their costs, especially in the realm of employee hours. A freelance copyeditor may find that one 2,500-word article takes twice as long to complete as another article of the same size because of differences in quality that are often difficult to anticipate ahead of time.

LABOR COSTS. Labor costs consist of the cost of the work that goes into the manufacturing of a product or the execution of a service. Direct labor costs can be figured by multiplying the cost of labor per hour by the number of employee-hours required to complete the job. Business owners, however, need to keep in mind