Prices, profits, margins, and risk

Determine your margin, calculate total costs, and set your price to yield the desired profit margin.  That is the common method employed at most organizations.  When asked to explain why this approach was used, the response is always a variation of “this is how we’ve always done this.”  The moment they realized the forecast was not perfectly accurate, their entire pricing strategy fell apart.

When I review a failed strategy with a client, their math is never wrong.  Their assumptions are never right.  If your organization has a strategy or process in place and nobody can explain why it is used, it is a good idea to step up and ask why.  You will mitigate the risk facing your organization every time.  If the strategy is as good as they think, it will stand up to your scrutiny every time.