There are two ways to price your product; cost plus and market pricing. Both have benefits and risks.

When we built homes we would do a cost estimate on the home then add a percentage (markup) that we had over time developed to cover overhead, sales and profit.  On homes that were custom designed for a specific client as long as we met budget and were able to justify the cost the cost plus method gave us a predictable return for our work effort.

When we built homes on speculation for sale after completion we estimated the home and added a percentage the same way but we also did a market pricing just like a real estate agent would price an existing home for sale.  If the market price was higher than the cost plus price we would put it on the market at the higher price.  The additional margin would compensate us for the added risk of not having the home presold and having to pay interest on the construction loan for an extended time.

If the cost plus price was higher we would reconsider the project to see if we could adjust the cost to match the market price, change models or make other corrections. If we could not get the cost plus pricing and the market price to balance we would market the lot and move on.

The danger of cost plus pricing only is that it if the product is not presold you can either leave money on the table or worse wind up with a product that you need to discount below your anticipate margin or even at a lose.

Marketing only pricing also has its risks. I knew an excavating contractor who would match any bid. His theory was that the market was setting the price and if another contractor could do the project at a given price so could he.  He wound up taking too many low or no margin projects and his business failed.

You should use both methods to determine your  sell price.

Original Content copyright 2010 Thomas Robinson