The ideal price for any product or service is one that is acceptable to both buyer and seller. From the buyerâ€™s standpoint, the right price is a function of product purchase value and other competitive choices in the marketplace.
From the sellerâ€™s viewpoint, there are many potential pricing objectives, but the basic concern for almost all business is to price products to maximize both sales and profit. (Discuss)
Listed below are steps to consider for determination of product pricing:
â€¢ Analyze the size and composition of your target market
â€¢ Research price elasticity for your product
â€¢ Evaluate your productâ€™s uniqueness
â€¢ Select your channels of distribution
â€¢ Consider product life cycles
â€¢ Analyze cost and overhead
â€¢ Estimate sales at different pricing levels
â€¢ Consider secondary pricing strategies
What does price elasticity mean for product pricing? What does Predatory pricing or defensive pricing mean?
Volume of sales needed to at least cover all your costs. TR= TC
1. Sales price per unit â€“ VC per unit = contribution margin per unit
2. Contribution margin per unit divided by sales price per unit = contribution margin ratio
3. Breakeven Sales Volume = Fixed Costs divided by contribution margin ratio
Most common errors made in pricing are:
1. Pricing products or services based solely on the cost to produce.
2. Pricing products based on competitorâ€™s prices.
3. Not pricing product relative to its value!!!
Must identify competitive price structure you are operating under.
â€¢ Pure competition â€“ many competitors, no differentiation in product, same price is very elastic or sensitive to price changes
â€¢ Monopolistic competition â€“ no dominant competitor in the industry, very little differentiation, elastic price conditions. Use markup on selling price method to pricing
â€¢ Oligopolistic competition â€“ industry has a dominant competitor. Price is inelastic. Use markup on cost method for pricing.
Build a demand curve. Consumers determine product demand curve with emphasis is placed on shifting demand curve upwards to the right. Curve helps marketers understand how customers determine market value. Develop a plan to take market share away from your closest competitor.
Choose four competitors product pricing and plot on a curve using a bar graph. List the price for each on the vertical axis.
Determine competitive price range. Ceiling and floor pricing from step two to determine your range.
FLOOR- cannot sell below without changing our consumersâ€™ view of your product.
CEILING-price too high changes view of what my product is? You can raise the ceiling if you are successful with your marketing efforts by creating greater value.
*Price development – strategically where am I going with the product? Link to market share objectives.
*Price relative to valueâ€¦competitive price range.