Pricing is an important topic faced by all entrepreneurs. There are many factors that affect the price of a product or service. The purpose of pricing is to enable the entrepreneur to gain market share while achieving a target rate of return. Pricing must be high enough to cover the cost of doing business while earning a reasonable profit. In some cases, due to high level of competition, a business owner is unable to set the price of its products or services. This happens with mostly commodity services or products where customers see little difference between competitors’ products. If this is your case, then you need to get serious about watching your cost.

As a small business owner in a competitive market, you are a price taker. To stay profitable, you need to control cost by setting a target cost of making your products or services. The formula for target cost is as follows:

Market price – desired profit = target cost.

If the business owner cannot reach this target cost, then it will not reach its desired profit. Once a target cost is reached, the business owner will need to work with its team to make sure that the cost of production stays within the target cost.

It is difficult to operate in a competitive market. It is even more difficult if cost is not controlled. A small business owner facing fierce competition must set a target cost and must be careful to stay within the target limit.