Under valuing or under pricing your value-added product or service is a common mistake in bringing a product to market. 

What is the value of a product? The phrase "value bundle" is often used to describe all the attributes of a product that give it value to the user or consumer. This value can include:

Value is always determined by the customer but the responsibility lies with the product or service provider to make the customer fully aware of the product's attributes.

Sales price is a significant measure of the value of the product in the marketplace. Sales price also has a direct impact on your profit margin per unit sold. Since total profit is the profit margin per unit sold times the number of products sold - sales price matters.

R. Gary Morton of Morton Horticultural Associates stresses the importance of not giving away your profit margin by setting prices too low or offering too generous volume discounts. This is a great temptation and a common mistake in introducing new products.

Gary uses the following table to illustrate his point. For example, you have a 25% margin (calculated as a percentage of sales price - for example-sales price $1.00 per unit, cost $0.75 per unit giving a margin % of 25 % -- $.025/$1.00 X100). You want to know how much more product you will have to sell if you reduce the price by 10% in order to end up with the same amount of profits as compared with the starting price and volume .

Locate the 10% row in the left hand column. Follow the row until it meets the 25% Margin Column. The result is that you will need to sell 66.7% more product at a 10% less price to give the same total margin.

If at the lower price you sell more than the chart result then you will have more total profits. Because the margin is calculated as a percentage of sales price, if you drop your price by the same amount as your margin then there is no profit as sales price equals the cost of production.

Too often volume discounts are offered that wipe out profits. Also it is difficult to raise prices once you have introduced the product so time and effort should be invested in getting it right the first time. 

Too often people introduce a new product and aim at a price less than the existing market competitors rather than creating a product that is distinctive and then pricing and promoting the extra value of the product. 

Again margin (and profit) is given away from the start putting unrealistic pressure on the product to sell quickly in order to get the sales volumes. 

Finally, it is crucial to know your total cost per unit including production costs, marketing, selling, distribution costs and retail costs if applicable. 

Make sure your business has information systems that can provide you with this information. If you don't know your real unit cost of production you cannot know your profit margin. Without knowing your profit margin per unit it is difficult to make let alone increase profits. 

Understanding the interaction of sales price, sales volume and profit when introducing a new value added product or service leads to better decisions. 

This article first appeared in the Better Decisions column of Better Farming.