FINANCE
PRODUCT PRICING
WHAT IS PRODUCT PRICING?
Product Pricing simply means To establish a
selling price for a product.
No matter what type of product you sell, the
price you charge your customers or clients will
have a direct effect on the success of your
business. Though pricing strategies can be
complex, the basic rules of pricing are
straightforward:
BASIC RULES OF PRICING
• All prices must cover costs and profits.
• The most effective way to lower prices is to
lower costs.
• Review prices frequently to assure that they
reflect the dynamics of cost, market demand,
response to the competition, and profit
objectives.
• Prices must be established to assure sales.
COST OF RUNING A BUSINESS
• Before setting a price for your product, you
have to know the costs of running your
business. If the price for your product or
service doesn't cover costs, your cash flow will
be cumulatively negative, you'll exhaust your
financial resources, and your business will
ultimately fail.
COST OF RUNING A BUSINESS CONTINUATION
• To determine how much it costs to run your
business, include property and/or equipment
leases, loan repayments, inventory, utilities,
financing costs, and
salaries/wages/commissions. Don't forget to
add the costs of markdowns, shortages,
damaged merchandise, employee discounts,
cost of goods sold, and desired profits to your
list of operating expenses.
COST OF RUNING A BUSINESS CONTINUATION
• Most important is to add profit in your
calculation of costs. Treat profit as a fixed
cost, like a loan payment or payroll, since
none of us is in business to break even.
Because pricing decisions require time and
market research, the strategy of many
business owners is to set prices once and
"hope for the best." However, we need to the
right time to review product prices
WHEN TO REVIEW PRODUCT PRICES
• You introduce a new product or product line;
• Your costs change;
• You decide to enter a new market;
• Your competitors change their prices;
• The economy experiences either inflation or
recession;
• Your sales strategy changes; or
• Your customers are making more money because
of your product or service.
WAYS OF ESTABLISHING PRICES
Prices are generally established in one of four
ways namely:
• Cost-Plus Pricing
• Demand Price
• Competitive Pricing
• Markup Pricing
COST-PLUS PRICING
Many manufacturers use cost-plus pricing.
The key to being successful with this method
is making sure that the "plus" figure not only
covers all overhead but generates the
percentage of profit you require as well. If
your overhead figure is not accurate, you risk
profits that are too low.
Illustration on cost-plus pricing:
• Cost of materials 50.00
• + Cost of labour 30.00
• + Overhead 40.00
• = Total cost 120.00
• + Desired profit (20% on sales) 30.00
• = Required sale price 150.00
DEMAND PRICE
Demand pricing is determined by the
optimum combination of volume and profit.
Products usually sold through different
sources at different prices--retailers, discount
chains, wholesalers, or direct mail marketers--
are examples of goods whose price is
determined by demand.
COMPETITIVE PRICING
Competitive pricing is where the
price covers costs (cost of raw materials
and the cost of operating the business)
and is comparable to the competitor’s
price.
Competitive pricing is generally used
when there's an established market price
for a particular product or service
COMPETITIVE PRICING CONTINUATION
Competitive pricing is used most
often within markets with
commodity products, those that
are difficult to differentiate from
another.
MARKUP PRICING
Simply means Include a profit percentage with
product cost .
Mark-up pricing is favoured by businesses
with many products because it is simple to
calculate. The profit level you want for the
business is expressed in a percentage. This
percentage is added to the production cost to
set product price.
MARKUP PRICING CONTINUATION
Mark-up pricing is common in retail
business because of so many types
of products and purchases from
many vendors
PRICING BASICS
To price products, you need to get familiar with
the pricing structures, especially the difference
between margin and mark-up.
Margin, or gross margin, is the difference
between total sales and the cost of those
sales.
ILLUSTRATION
If total sales equals =N=1,000 and cost of sales
equals =N=300, then the margin equals
=N=700.
Gross-profit margin can be expressed in Naira
or as a percentage. As a percentage, the
gross-profit margin is always stated as a
percentage of net sales
The equation: (Total sales ? Cost of sales)/Net
sales = Gross-profit margin
Using the preceding illustration, the margin
would be 70 percent.
(=N=1,000 ? =N=300) / =N=1,000 = 70%
TIPS FOR SUCCESSFUL PRICING
• Good product prices are important to any
successful business. Pricing takes creativity,
time, research, good recordkeeping and
flexibility. You need to balance the costs of
producing a product with competition and the
perceptions of your target customer to select
the right product price. Follow these tips to
ensure greater pricing success.
TIPS FOR SUCCESSFUL PRICING CONTINUATION
• Be creative
Think of new ways to sell more to existing
customers or to attract new customer groups.
• Listen to your customer
Make a point of noting customer comments in a
journal or file. Review them periodically to glean
new ideas.
• Do your homework
Keep good notes of how you arrived at a price so
you can make similar assumptions in the future.
TIPS FOR SUCCESSFUL PRICING CONTINUATION
• Boost your records
Good recordkeeping will help you to set a price and to
track the performance of your pricing.
• Cover the basics
The three basics of pricing are product price,
competition and customers. Blend pricing methods to
ensure the three basics are in balance.
• Be flexible
Constantly review both internal and external factors
and calculate how a price change would affect the new
situation.
CONCLUSION
The pricing method you
select provides direction
on how to set your
product price.
THANK YOU
Presented By:
ODEDELE TOSIN (AAT,HND,ACA)
08053256411
