SLC | S21W5 | Costs for entrepreneurs - Pricing.
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What is the importance of the pricing process?
When it comes to the pricing process it is crucial for businesses for so many reasons as the profitability of a business, customer perception, and market competitiveness are directly impacted by the pricing process. Let's take a look at the importance of the pricing process in businesses.
Importance of the pricing process
Profitability: What determines the revenue that a business generates is pricing which simply means setting the right price helps businesses cover their costs and earn a sustainable profit.
Market Positioning: The positioning of a brand is reflected by pricing. For example, competitive pricing appeals to cost-conscious consumers whereas premium price means high-quality products.
Customer Perception: Products' prices influence how customers perceive their values which means an appreciative pricing strategy can encourage customer loyalty and build trust.
Demand and Sales Volume: Pricing affects demand for services and products which means a well-calculated price can optimize sales volume without affecting profit margins.
Competitive Advantage: Strategic pricing helps businesses to stand out in competitive markets which means pricing can attract customers, deter competitors, and market share.
Based on what we have shared above, it means businesses achieve a lot from the pricing process a well-designed pricing process can help businesses achieve their financial goals and deliver quality services (products) to customers.
What aspects should be considered when establishing the price of a product or service?
The aspects that should be considered when establishing the price of a product or service is for the price to align with business market conditions, business goals, and customers expectations which below are some of the critical factors that need to be considered.
Cost Structure:
Fixed Costs :These are costs that remain constant regardless of the levels of production such as salaries and rent.
Variable Costs: These are costs that change with the volume of production, such as packaging and raw materials.
A business needs to ensure that price covers cost and includes a profit margin.
Customer Perception and Target Market:
Businesses need to understand their target audience and their willingness and ability to pay.
Businesses need to consider how the price will reflect the perceived value of their service or product.
Factor in customer purchasing behavior and customer preferences.
Competitor Pricing:
Businesses need to analyze competitor prices to position their product competitively.
Businesses need to decide whether to adopt premium pricing or penetration pricing strategy.
Legal and Regulatory Factors:
Businesses should comply with pricing regulations such as price caps or anti-dumping laws.
Businesses should avoid deceptive pricing practices.
Pricing Strategy
Businesses should choose a strategy that aligns with their goals.
Cost-plus pricing: This m and adding a markup to the cost.
Value-based pricing: This is based on perceived value.
Dynamic pricing: This means adjusting prices based on market conditions and demand.
Provide examples of businesses that fit the pricing methods explained in class, stating your reasons.
Here are good examples of businesses that fit the pricing methods explained in class, along with my reasons for their alignment.
Cost Plus Pricing
Example: Manufacturing companies like General Motors, caterpillar, etc.
Reason: Such types of companies calculate the total cost of production which comprises; materials, labor, and overhead costs, and add a fixer percentage markup to determine the selling price. This method ensures that all costs are covered while guaranteeing a profit margin.
Value-Based Pricing
Example: Apple Company
Reason This is because Apple prices its products based on the perceived value of its brand and the innovation of its products. Having said so, customers are willing to pay a premium for the quality, and ecosystem integration of Apple devices and design.
Competitive Pricing
Example: Walmart
Reason: Walmart uses competitive pricing to offer products at or below the prices of competitors. This along with its low-cost leadership strategy appeals to price-sensitive customers.
Premium Pricing
Example: Rolex
Reason: This is because Rolex company makes use of premium pricing to emphasize its luxury exclusivity and status. With this customers associate the high price with superior prestige and quality.
The company Steemians invests $130,000 in the equipment needed for its production to enable the production and subsequent sale of the new product. A return of 20% on the value of the investment is expected. The expected sales level for next year is 21,000 units.
Solution
For me to determine the percentage of profit that is required, I will have to first calculate the total profit that is needed to achieve the desired return and distribute it across the expected sales volume. Having said that let's take a look at the given information below 👇 first.
| Initial Investment | $130,000 |
|---|---|
| Expected Return | 20% of $130,000 = $26,000 |
| Total Profit Needed | $26,000 |
| Unit Production Cost | $25.00 |
| Sales Volume | 21,000 units |
From the above, we can see the following:
Profit per unit = $1.24
Selling price per unit = $26.24
Percentage Profit= 4.96%
4.96% is the percentage of profit that is required.
For me to be able to calculate the price at which the product should be sold to achieve the desired profitability I will have to calculate it as stated below 👇.
Market Entry Price = Selling Price Per Unit = 26.24
$28.00 is the competition price, and it is higher than the calculated selling price of $26.24
Steemians could enter the market at $26.24 and offer a competitive advantage by undercutting the competitor's price by $1.76, while still achieving the desired return at the same time.
Summary of Company Steemian
4.96% is the percentage of profit required.
$26.24 per unit is the market entry price.
$28.00 is possible to compete, as the calculated price is lower than the competitor's price.
I am inviting; @dove11, @simonmwigwe, and @ruthjoe
Cc:-
@yolvijrm
I know you are an expert on costing and will definitely try this one.
Thanks for your support.