Pricing is a process used by companies to determine how much they will get paid for their products or services. Correct pricing is an essential element of any successful business venture
You need to consider both cost and profit when setting your prices. Too high a pricing strategy might result in lower customer interest and thus fewer orders; too low a pricing strategy might lead to losses due to insufficient revenues. Therefore, you need to set your prices so that they cover both costs and profits.
Regardless of whether you’re running a small or large company, you need to carefully consider your prices before you start. You should know the costs associated with each item you sell.
- Your costs include everything you spend to create your products and services.
- The price is your compensation for offering the product or service.
- Your product or service has a perceived (or real) market price.
Different Cost Factors In Pricing
You’ll need to determine the value of your item before determining how much you should charge for it. Calculating the correct value of an item is one of the most important parts of selling. Generally, every item can be broken down into two categories: Fixed costs and Variable Costs.
A fixed amount must be paid regardless of whether the item sells or not. Examples include rent, utilities, insurance, and advertising. Variable costs depend on the number of units sold. They may include labor, materials, shipping, and discounts.
Fixed costs are expenses that must be paid regardless of whether or not there is an income from operations. Examples include rent, lease payments, salaries, insurance, taxes, etc.
Variable costs are those which vary depending on the level of income generated by the operation. Examples include raw material purchases, utility bills, payroll, advertising, etc.
Different Pricing Strategies
Cost-Plus Pricing
Under the “direct materials” category, you add up the direct materials used to produce a product, plus any direct labor costs, plus any overhead costs. You then multiply these numbers by a fixed markup rate to determine the final retail selling prices of products.
To calculate the total cost of manufacturing, add together the costs for materials, labor, and overhead. Then multiply by 30%.
Pricing products is not difficult, but you need to decide which overhead costs to include when calculating the price of multiple products.
Value-Based Pricing
It’s important to focus on the value you provide to customers rather than just focusing on the cost of providing that value.
You will want to be familiar with your target audience to determine if they’re willing to pay for something that costs more than their monthly budget.
Cost-plus pricing is based on the total cost of producing the product, whereas companies offering products or services that are unique or highly valued can benefit from a price based on the benefits provided by the product.
Demand Pricing
Demand pricing is generally set by the optimum mix of volume and profit. Examples include products sold through retail outlets, discount stores, wholesale distributors, and dealers.
Wholesalers and distributors buy products in bulk for a cheaper price than retailers who purchase smaller amounts. However, retailers pay more per unit because they’re buying in smaller quantities.
Competitive Pricing
Pricing a product or service at a lower rate than its competitors because they’re offering a better deal.
When using competitive pricing, you need to know the current price levels for similar products from competitors. You can choose to be under, at, or above the competition depending on which option makes sense.
Markup Pricing
A markup means the extra value that manufacturers, wholesalers, and retailers add to a good/service. It is usually determined by the seller.
Essentially, this approach aims to set pricing that covers the costs of production and provides enough profit for the company to earn its target return.
Skimming Pricing
You can charge a high price for something if you offer a unique product or service. This is called skimming. However, you must ensure that what you’re offering is truly unique. Once the initial group of buyers has been served, the firm may lower its prices to entice new customers.
Skimming is useful if there are enough potential buyers who want to pay for the service at a high cost and the high cost doesn’t deter competition.
Pricing For Different Life Cycles
Depending on your product or service stage, you may use different price models for different purposes. Here are three common ones.
New Launch
A low-cost strategy – to get people to use your product or service for free. And then they might come back later when they’re ready to buy something else from you.
High price strategy – usually applied to products or services that have a unique selling proposition (USP). Products or services that have a USP tend to be expensive.
Growth Stage
Use low prices to prevent new competitors from coming into the market.
High-profit strategy – used to increase sales.
The Decline of Maturity Stage
Cost-cutting low-cost approach.
A high-cost strategy is one that aims to maximize revenues so they can be spent on new projects.
You may find yourself needing to raise your price if you’re not keeping pace with your competition. But remember that you’ll also have to lower your price if your customer base shrinks. So do both.
And don’t forget to factor in the cost of goods sold (COGS) into your calculations. That means including everything you’ve spent on raw materials, manufacturing, shipping, marketing, and overhead expenses.
You may like to read: Running a Junk Removal Business: Tips to Get Started
