How Much is Enough?

profitSeems a little sarcastic asking the question “How Much is Enough?”. I’ve once read of this when someone is telling a story about a rich man asked with that question. The rich man answered “Just a little bit more”. The story was pointing to man’s greed but our topic is about how much will an entrepreneur set a price to his products or services. Basically there are two methods of setting a price for his products or services.

The most common type is a fixed percentage added to a product called the cost oriented method. The other one is adjusted on what the market is willing to pay for the merchandise which is the demand-oriented method.

In addition to this, let me emphasize the meaning of mark up. I myself was confused with this term and assume that mark up is equivalent to profit. But mark up means “the amount added to the cost price of goods to cover overheads and profit.” (from Oxford Dictionary). For example, if you are selling shoes that cost 150 pesos and added 200 pesos which you sell for 350 pesos, you still have to deduct your overhead expenses to the 200 pesos you’ve added then you will know the profit.

The two method are usually combined specially now on this competitive world. A simple cost oriented method is just an ideal way of fixing a mark up but due to competitors and price sensitive buyers, a demand oriented method is a more realistic way of setting a price. And by experimentation of price adjustments, we will know what the market is willing to pay for the merchandise.

So whichever method we are want to use, quality is more important along with the competitive price we want to implement. Because if we always sacrifice quality just to meet our target profit, then in the long run customers will turn their backs on us.