Pricing and Cost Of Doing Business

Pricing and Cost Of Doing Business

What is Pricing

Pricing is the method followed by a business to determine the selling price for its products or services.

Price is one of the four Ps of marketing.

The other three are product, promotion, and placement.
These are all costs incurred by a business during operation.
Pricing is influenced by the cost of production, promotion, and placement of the product being sold.

Other pricing factors include competition, market conditions, brand, and quality of theproduct.

Steps for Pricing a Product Include:

Developing a marketing strategy,
Creating the “marketing mix of products,” a technique used to develop plans for marketing a product,
Studying and estimating the demand for a product,
Calculating the fixed and variable costs related to a product,
Generating a price based on the market needs by predicting competitor strategies and
understanding legal constraints.
Setting the price of the product using the information collected through the previous
steps.

Pricing vs. Costing

 

To determine the price for a product or service, business owners should understand the costs of running their business.

If prices do not exceed costs in the long run, the business will fail!!

Costs include:

Property and equipment leases,
Loan repayments,
Inventory,
Utilities,
Financing costs, such as interest on loans,
Salaries/wages/commissions,
Markdowns,
Shortages, such as not having an item in stock,
Damaged product,
Employee discounts.

Profit should be included on the list of costs and treated as a fixed cost.
You are not running  a business just to break even!.
The “Marketing Mix of Products” is composed of the four Ps of marketing:

Product
Price
Place
Promotion

A business needs to create a marketing strategy by identifying the  target market and product placement. Ideally, the price of a product should match its quality.

Pricing Objectives

Any part of a pricing strategy depends on the objectives of ownership.
Some common pricing  objectives are:

Increasing sales: Here, the objective is to sell the maximum number of product units or
serve the maximum number of customers to decrease long-term costs and increase market
share.
Increasing profit: Here, the objective is to increase current profit by increasing revenue
and decreasing costs.
Increasing revenue: Here, the objective is to increase current revenue irrespective of
profit margins. Here, the company is trying to maximize long-term profits by increasing
the market share and reducing costs.
Considering competitors’ price: Price of a product should be fixed considering the
competitors’ prices.
Maintaining quality leadership: The objective is to use price to create a perception that
the product is a quality leader.
Maintaining stability: Here, the objective is to avoid price wars and achieve price stabilization to maintain profit at a steady level.

Pricing Strategies in Sales Promotion

Pricing strategies can also be used as sales promotion tactics.
Some common practices:
Skim Pricing,
Penetration Pricing,
Leader Pricing,
Premium Pricing,
Differentiated ( Price Discrimination) Pricing…this is illegal!!
Psychological Pricing, and
Discounts and Sales.

Skim Pricing

Let’s start with skim pricing. Using this strategy, the organization attempts to sell a product at a high price. This is mainly aimed at customers who are not concerned about the price when the product is new to the market and there are fewer competitors. The price decreases when more competitors enter the segment.

This strategy can be used when:

The product is new to the market and there is little competition,
Demand is fixed and the customers are not too price-sensitive,

Penetration Pricing

In the Penetration Pricing strategy, the business tries to maximize the quantity sold and increase the market share, by lowering the prices.
This strategy can be used when:

The customers are price-sensitive and the sales will increase as the price declines,
Higher volumes guarantee cost savings,
The product or service is of a type that can gain mass appeal rapidly, and the competition is intense.

Lost Leader Pricing

In the Leader Pricing strategy, a product or a group of products is offered at cost, or below,  to attract customers with the expectation that they will also buy premium products.
Usually, supermarket retailers use this strategy.

Differentiated Pricing…illegal!!

Differentiated Pricing is also known as Price Discrimination.
In this strategy, the same product or service is priced differently for different customers and
different markets.

Psychological Pricing…has historically being used in supermarkets

Psychological pricing is the practice of displaying prices which are a few cents less than a price expressed in full dollars. This is based on the assumption that the customers will not round the dollars-and-cents prices up, and that, therefore, they will consider the dollars-and-cents price to be significantly lower, when it is only marginally lower. Thus, this strategy is based on prices that appear as a bargain, to the consumer at first glance-for example, $2.99 per pound instead of $3.00 per pound. Nowadays, many companies use psychological pricing to increase their sales.

Discounts and Sales

Consumers today are used to discounts and sales. Most people buy in large quantities only if the product is available on sale. Most supermarkets have sales on all the time, or have very small interval between sales.

Here are some types of discounts offered to customers in supermarketing:

Quantity discount: Family size packages
Multiple purchases, such as 6 bottles of wine at a decent discount.

Pricing Model Categories

Cost-based pricing
Customer-based pricing
Competition-based pricing.

Cost-based Pricing

Such as determining the labor factor of a certain meat cut…they are not all created equally!!

Customer-based Pricing

Could be determined by fast moving items or variations in store demographics in multiple store operations

 

Competition-based Pricing…In my opinion this is not the way to go, since most business have different “costs of operation” what might be profitable for the competitor may drive you out of business!!

Common Pricing Mistakes

Not having a strategy (plan) or not sticking to your strategy,
Underestimating costs.
Assuming that the only way to compete is via low price/
Setting your pricing strategy and forgetting to check if it works well or needs a modification.
Ignoring legal issues.

Now what should you do now?

Step 1) Evaluate your current pricing strategies.

Step 2) Evaluate strategies that may have to be revised.

Step 3) Create a game plan for revising strategies or coming up with new ones.

Step 4) Identify whether the current strategies can lead to any legal problems.