Determining Pricing for a Lumber Business

 Lumber retailers usually purchase wood from sawmills or other vendors / suppliers and then sell it to customers at a price that is greater than their costs. That gross profit margin needs to cover all fixed expenses. We are going to talk about pricing strategies here today.

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The business must determine appropriate pricing strategies to ensure profitability while remaining competitive. They must also manage costs, including transportation, storage, and labor costs, to maximize profits.

  • Cost-plus pricing: This pricing method involves determining the total cost of acquiring the lumber (including transportation, storage, and labor costs) and then adding a markup percentage to arrive at the final retail price. What's a reasonable markup percentage? 10% to 40% can be considered reasonable but it depends volume and specific circumstances. 
    • Example: If the cost of acquiring the lumber, including transportation and storage, is $1 per board foot, and a retailer wants to earn a 20% profit margin, they would sell the lumber for $1.20 per board foot. This would result in a markup percentage of 20%. That extra 0.20 per board foot needs to cover overheads as well.
  • Value-based pricing: This pricing method involves setting the price based on the perceived value of the lumber to the customer. This can be determined by factors such as the quality of the wood, the rarity of the species, and the demand for the product.
  • Competition-based pricing: This pricing method involves setting the price based on the prices charged by competitors. This method can be useful in a market where there are many competitors, and price is a major factor in the buying decision.
  • Dynamic pricing: This pricing method involves adjusting the price of the lumber in real-time based on factors such as supply and demand, competitor prices, and other market conditions.
  • Psychological pricing: This pricing method involves setting the price based on the psychological effect it has on the customer. For example, pricing a product at $9.99 instead of $10 can create the perception of a lower price. You may use this in combination with the above strategies as it is not really for figuring out a price range, but rather a way to display whatever price you have come up with.

Article found in General Industry.