Tips for Pricing Your Products

Pricing

Pricing Objectives

Your pricing objectives must be identified in order to determine the optimal pricing. As a guide pricing objectives usually include or take account of the following: -

1. Current Profit Maximisation – seeking to maximise current profit, taking account of revenue and costs. Current profit maximisation may not be the best objective if it results in lower ‘long term’ profits.

2. Current Revenue Maximisation – seeking to maximise current revenue with no regard for profit margins. The underlying objective often is to maximise ‘long term’ profits by increasing market share and lowering costs.

3. Maximising Quality – seeking to maximise the number of units sold or the number of customers served in order to decrease ‘long term’ costs.

4. Maximising Profit Margin - attempts to maximise the unit profit margin, recognising that the quantities will be low.

5. Quality Leadership – Use price to signal high quality in an attempt to position the product as a quality leader. Care is needed so as not to encourage competitors to ‘cash in’ on a high profit item.

6. Partial Cost Recovery – This is a situation where you have alternate profit sources, and you may wish to attract a customer, through one product to another.

7. Survival – In situations such as market decline and overcapacity, the goal may be to select a price that will cover costs and permit you to remain in the market. In this case, survival may take priority over profits. This objective is a short term objective.

8. Status Quo – you may seek to stabilise your prices in order to withdraw from price wars, or to avoid such wars. This maintains a moderate but stable level of profit.

Pricing Strategy

One of the four major elements of marketing mix is price. Pricing is an important strategic because it is related to product positioning. Furthermore, pricing affects other marketing mix elements such as product features, market sector decisions and the ability to promote the product.

Whilst there is no single recipe to determine pricing, the following is a general sequence of steps that should be followed for developing the pricing of new products as well as re-pricing existing products.

1. Develop a marketing Strategy – perform in-depth market research, look at market segmentation, targeting, and positioning.

2. Make marketing mix decisions – define the product, packaging, distribution and promotional tactics.

3. Estimate the demand – understand how quantity demanded varies the price.

4. Calculate cost – include all the variable costs associated with the product, to obtain a true all inclusive cost.

5. Understand environmental factors – evaluate the likely competitor actions; understand the legal constraints and whether Government policy may change the need for your product.

6. Set pricing objectives – for example, profit maximisation, revenue maximisation, or price stabilisation, in other words maintain the status quo.

7. Determine pricing – using the information collected in the 6 steps above, select a pricing method, develop a pricing structure, and define discounts for the segments you intend to sell to.

These steps are interrelated and not necessarily performed individually, or in this order.

Marketing Strategy and the Marketing Mix.

Before the product is developed, the marketing strategy must be formulated, including target market selection and product positioning. There is usually a trade off between the quality you desire for the product and the price you want to charge. Price is an important variable in positioning your product.

Because of inherent trade offs between marketing mix elements (product planning, pricing, branding, distribution channels, personal selling, advertising, promotions, packaging, display, servicing, physical handling, fact finding and analysis). Pricing will depend on other product, distribution, and promotion decisions.

Estimating Demand

Because there is a relationship between price and quantity demanded, it is important to understand the impact of pricing on sales by estimating the demand for the product. A graph can be created to show a ‘demand curve’. On one axis you will have price and on the other the quantity. A line can be drawn on the graph to show a price at a particular quantity. These points joined together create a demand curve. Reference to this curve will give quantity discounts available and allow decisions to be made on quantity purchasing and stock holding to reduce the price to the customer.

Calculate Costs

In deciding to launch the product, there is a basic understanding of the costs involved already. These costs need to be multiplied by a number which can cover the fixed costs your business carries, to leave a portion of the selling price as profit. The number you choose will depend on a combination of your desire to be competitive and the fixed costs you carry.

Environmental Factors

Pricing must take into account the competitive and legal environment in which a company operates. From a competitive standpoint, you must consider the implications of your pricing on the pricing by competitors. For example, setting the price too low may risk a price war with the competitor. Whereas setting the price too high may attract a large number of competitors who want to share in the profits available.

Pricing Methods

1. Cost Plus Pricing – set the price at the production cost plus a certain profit that you wish to make per item or per contract etc.

2. Target Return Pricing – set the price to achieve a target return on investment

3. Value-Based Pricing – base the price on the effective value to the customer relative to alternate products.

4. Psychological Pricing – base the price on factors such as signals of the product quality, popularity price points, and what the customer perceives to be fair.

Price Discounts

1. Quantity Discount – offered to customers who purchase large quantities.

2. Cumulative Quantity Discount – a discount which increases as the cumulative quantity increases. Cumulative discounts may be offered to resellers who purchase large quantities over time but do not wish to place large individual orders.

3. Seasonal Discount – based on the time that the purchase is made and designed to reduce the peeks and troughs in manufacture.

4. Cash Discounts ­ - extended to customers who pay their bills before the specified time.

5. Trade Discount – a functional discount offered to re-sellers to ensure that their reseller price can be competitive.

6. Promotional Discount – a short term discount price offered to stimulate sales. This often opens accounts for you and then subsequent sales are at normal profit margin.

We at BHMA hope that the above information has been helpful.