GROUP 5
SYB: 5
Costing and Pricing your
Services or Products
Costing
Costing is the way the entrepreneur calculates or works
out how much each individual product (goods or
service) costs to produce or sell.
Pricing
Pricing is the act of determining the value of a product
or service. Pricing determines the cost paid by a
customer, but it may or may not be tied to the cost
paid by the business to produce the product or service.
Background
The price you charge for your product or service is one
of the most important business decisions you make.
Setting a price that is too high or too low will - at best -
limit your business growth. At worst, it could cause
serious problems for your sales and cash flow.
Background
If you're starting a business, carefully consider
your pricing strategy before you start.
Established businesses can improve their
profitability through regular pricing reviews.
Topic
Topic 1: The difference between cost and
value
Topic 2: Covering fixed and
variable costs
Topic
Topic 3: Cost-plus versus value-based pricing
Topic 4: How to build a pricing strategy
Topic
Topic 5: Different pricing tactics
Topic 6: Raising or lowering
prices
Topic
Topic 1: The difference between cost and
value
The difference between cost and value
Knowing the difference between cost and value can
increase profitability:
the cost of your product or service is the amount you
spend to produce it
the price is your financial reward for providing the
product or service
the value is what your customer believes the product or
service is worth to them
The difference between cost and value
To maximise your profitability, find out:
what benefits your customers gain from using your product or
service
the criteria your customers use for buying decisions - for
example, speed of delivery, convenience or reliability
what value your customers place on receiving the benefits you
provide
Wherever possible, set prices that reflect the value you provide
- not just the cost.
Topic
Topic 2: Covering fixed and
variable costs
Covering fixed and variable costs
When you set a price, it must be higher than
the variable cost of producing your product
or service. Each sale will then make a
contribution towards covering your fixed
costs - and making profits.
Every business needs to cover its costs in order to make a profit.
Working out your costs accurately is an essential part of working
out your pricing.
1.
Fixed costs are those that are always there, regardless of how
much or how little you sell, for example rent, salaries and
business rates.
2.
Variable costs are those that rise as your sales increase, such
as additional raw materials, extra labour and transport.
Topic 3: Cost-plus versus value-
based pricings
Cost-plus versus value-based pricings
There are two basic methods of pricing your
products and services: cost-plus and value-
based pricing. The best choice depends on
your type of business, what influences your
customers to buy and the nature of your
competition.
Cost-plus versus value-based pricings
1. Cost-plus pricing
•This takes the cost of producing
your product or service and adds
an amount that you need to
make a profit. This is usually
expressed as a percentage of
the cost.
3 Types of costs
Direct material cost
Direct labor cost
Overhead cost
Formula
• Cost-plus formula can be expressed as:
Cost + (Mark-up percentage x cost) = Target Selling Price
Cost-plus versus value-based pricings
2. Value-based pricing
•This focuses on the price
you believe customers are
willing to pay, based on
the benefits your business
offers them.
Examples of Value Based Pricing
Apple Company
Starbucks
Topic 4: How to build a Pricing
Strategy
Jardinan
FACTORS THAT MUST BE CONSIDERED IN
PRICE DEVELOPMENT STRATEGY:
Choosing Between Cost-Plus and Value-Based Pricing
Think about cost-plus or value-based pricing. A profit margin is added to
manufacturing expenses under cost-plus pricing, whereas value-based pricing
focuses on what consumers are prepared to pay for your product or service.
Competitive Analysis
Analyzing the rivals of the company, it is important in order to have a better understanding
of the products and services they provide as well as the pricing they demand.
Setting balanced prices
Underpricing may result in failed profit opportunities, whereas overpricing may cause consumers
to abandon a product. It is important that your pricing strategy corresponds with the market's
perception of the value of your product or service.
FACTORS THAT MUST BE CONSIDERED IN
PRICE DEVELOPMENT STRATEGY:
Perception Matters
Customers' opinions matter. An expensive product may convey high quality in
several markets.
Consumer Segmentation
Pricing for distinct consumer categories might be helpful. Offer discounts or special prices
to loyal or repeat consumers.
Pricing Tactics
Price to attract and keep clients. These include discounts, bundling, and promotions. Sales and
customer loyalty may increase with these techniques.
Expenses and Profit
The pricing should cover the variable expenses to help pay your fixed expenditures and make a profit.
Topic 5: Different Pricing Tactics
Common Pricing Strategies
Discounting Skimming
Odd Value Pricing Penetration
Loss Leader
Common Pricing Stratgies
1. Discounting
• Offering specially-reduced prices can be a powerful tool.
This could be a clearance discount to sell old stock, a
discount for making multiple purchases of the same or
similar products, or you could offer bulk discounts to
encourage larger orders. You should be able to make these
more profitable through lower costs.
Common Pricing Stratgies
2. Odd value pricing
• Using the retailer's tactic of selling products for
P9.99 instead of P10 can be useful if price is an
essential part of customers' buying decisions. Some
customers perceive odd value prices like this as being
more attractive
Common Pricing Stratgies
3. Loss Leader
• selling a product or service at a price that is not
profitable but is sold to attract new customers or to
sell additional products and services to those
customers.
Common Pricing Stratgies
4. Skimming
• is a pricing strategy that sets new product prices
high and subsequently lowers them as competitors
enter the market.
Common Pricing Stratgies
5. Penetration
• starting at a low price and gaining market
share before competitors catch up with you.
Topic 6: Raising or Lowering prices
There are two key questions you will need to answer:
What effect will the price change have on
the Volume of sales?
What will the effect be on the Profit per
sale?
INCREASING PRICES
Increasing prices can improve your profitability
even though your sales volume may drop.
If you are increasing your prices, always explain
to your customers why you are doing it. You can
use the price change as an opportunity to re-
emphasise the benefits you offer. A good
explanation can also strengthen your relationship
with a customer
There are also ways that you can hide price increases.
For example, you might:
Introduce new, higher-priced products or services and
make older, cheaper ones obsolete
lower the specification - and your costs - while
maintaining the same price
But be aware that hiding price increases can risk
adverse reactions from customers if they realise what you
are doing.
REDUCING PRICES
You should never take the decision to lower
prices lightly. Low prices often go hand-in-hand
with poor-quality service - is this the image you
want to create for your business?
Concentrate on building profits rather than
cutting prices to build up sales. In most
circumstances, your customers decide to buy
from you because of the benefits you offer, along
with your price. It is rare for the decision to be
made based solely on the price.
