How to price a product or services

To a buyer, price is that which people have to forego in order to acquire a product or service. Price is the way to make profit to a seller.

Here is some most important strategy for how to price product or service:

How to price a product

  • Factors Affecting Individual Prices
  • Selecting Pricing Approaches
  • Justification of Pricing at or below Cost of Production
  • Price Determination and Pricing Goals 

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A. Factors Affecting Individual Prices

There are many factors which may affect price. Some or all of the following considerations may apply in a specific case:

  1. Fair trade laws
  2. Nationally advertised prices
  3. Competitor price policies
  4. Market strategy
  5. Price lining
  6. Target return pricing
  7. Manufacturers’ suggested prices
  8. Type of merchandise handled
  9. Policy on loss leaders
  10. Seasonal nature of sales
  11. Demand factor for certain products

B. Selecting Pricing Approaches

Selecting right pricing approach is very important to small, business entrepreneurs. Selecting wrong approach may cause failure of the enterprise. There are three such approaches:

  1. Competition- based approach;
  2. Buyer-based approach, and
  3. Cost- based approach

Each of the above approaches has its own situations and relative merits &demerits. The first one may be cost-plus or based on break-even analysis & target profit- seeking. The Secom one may on the buyers’ perceived- value pricing while the third one be fixed observing price rates they are being charged currently by the competitors for similar products or services.

C. Justification of Pricing at or below Cost of Production

Usually, prices should be higher than the cost of production of the goods or services. But pricing at o below marginal cost may be considered desirable for a shorter period in certain special circumstances. The situations in which such prices are advisable include the following:

  1. Making known the new products;
  2. Popularizing a product;
  3. Driving out weaker competitors;
  4. Saving from total loss of evaporating or perishable commodities;
  5. Shifting / migrating to elsewhere;
  6. Wining foreign market; and
  7. Getting special lucrative governmental incentives likely to the declared on the sale volume.
  8. Raising sales volume of a better profitable joint or complementary products;
  9. Bringing the plant to full capacity utilization;
  10. Providing work to the surplus workforce who cannot be fired;
  11. Saving from likely total loss arising out of no demand resulting outdated fashion, etc:
  12. Taping better opportunity long-term advantage;

D. Price Determination and Pricing Goals 

Steps in Price Determination

Pricing Goals

  1. Research the competitive product offerings
  2. Estimate the total market demand.
  3. Calculate the available sales potential.
  4. Determine the volume objective.
  5. Set the company’s or department’s profit goals,
  6. Select on appropriate price strategy.
  7. Decide on the most effective distribution method.
  8. Establish costs of promotion.
  9. Anticipate the required discount strutting.
  10. Determine a specific list price.
  • The organization will maintain the highest price possible on a product, as long as the market share is held constant or growing.
  • The organization will maintain prices at a level consistent with competitive activity and market acceptance.
  • The organization will maintain prices that reflect an adequate return on investment.
  • The organization will maintain prices according to prevailing market conditions except where a greater profit might be attained from a unique.

Appropriate pricing is important to attract large number of customer and also to make reasonable profit. These two are seemingly conflicting, the small business entrepreneur must endeavor to reconcile and compromise between these two.

It is because high prices with the objective of larger profit will reduce the number of buyers. On the other hand, lower prices may draw larger number of customer but may not bring profit to the enterprise. It is as such to be handled with care and caution.

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