Archive for the ‘Pricing Factors’ Category
Price Levels and Profitability
The link between sales price, sales volumes and profit can be a very dramatic one. For a business that achieves 40 per cent gross profit margins, for example, a two per cent reduction requires that sales become boosted by five per cent as a result, just for that business to make the same level of gross profit as before. A ten per cent price cut, for example, would need to generate a 33 per cent increase in sales volumes simply to ensure that the business made the same amount for gross profit. In fact, 20 percent reduction in sales price would require that sales double to achieve the same level of gross profit. The stark message is that reducing prices to win business may be dangerous decision, since it can then require a much higher increase in sales volumes to be generated to allow the business to remain in the same place finally. Businesses that compete on price alone, or which becomes embroiled in price wars with competitors, ignore this effect at their peril. On the other hand, raising prices may cause a drop-off in sales volumes, but even though that fall may turn out to be a higher percentage than the price increase, the business may still be able to make a much gross profit. If that business were to raise prices by ten percent, it could afford to suffer a fall in sales volumes of up to 20 percent. Even with 20 per cent fewer sales, it would still make the same level of gross profit over all.
Pricing Matters
Pricing matters, and is itself an art form in many situations, backed up by some science from your business’s financial costings. The approach to pricing that will impress readers to your business plan is the one that comes from demonstrating a customer’s eye view of your offering. That customer’s eye view includes customers’ imperfect view of your rivals’ prices for direct competitor products and services and for substitutes. Here is a helpful final thought.
After they have grown large, and become diverse in their range of activities, it is often rather difficult to see the point from which successful businesses started out. Most began simply, however, meeting the needs of a small group of customers very well indeed, and then they built outwards in small steps from that point. Those steps may well have been rapid, but they were unlikely to have been gigantic leaps. Each step repeated what worked before, with alert and nimble management discarding errors as they occurred, and taking the lessons forward.
Cost Plus Method
Cost plus method is one of the pricing strategies based upon costs. The pricing of a product or a service must always have roots based in a business’s cost structure. There are two pricing strategies commonly employed by businesses that are based upon cost levels: the cost plus method and marginal costing. The cost plus method is exactly that, a mark-up usually expressed as a percentage, added to the cost price of a product or service. This approach is commonly used in retail businesses, where standard mark-ups of, say, 100 or 200 per cent might be applied. Cost-plus is simple method to understand, and is easily used, but it has inherent failings as a pricing mechanism in some situations. It does not, for example, take into account customer’s perceptions of the value of the business offering, other than in the very broadest terms where more up-market retailers will apply higher mark-up percentages than less expensive outlets.
The simple broad-brush approach of cost-plus also takes no account of the levels of demand between related product lines. The owner of a shop may find that all green jumpers have been sold, while the shelves remain fully stocked with blue jumpers, other identical in all respects. The blue ones carry no higher mark-up but remain unsold simply as a result of fashions in color leading to a lower demand. Management can solve this problem by cutting prices on the slower selling lines. The price reduction must to be sufficient to encourage buyers to purchase the less popular blue jumpers. Notice that round sum cost-plus percentage mark-ups do not take much account of competitors price levels either except in the broadest terms, nor do they reflect the fact that some of the business’s underlying costs will not vary with the volume of sales. Economies of scale affect input costs for what are referred to as variable costs, raw materials and labor costs, for example but will not affect what are known as fixed costs, such as shop’s expenditure on these effects can produce a circular relationship between sales prices, sales volume, and failing or rising costs per unit.
The Art and the Science of Pricing
As a marketing tool, prices are easy to understand and relatively easy to change. To maximize the profits generated by your business, your objective to set prices at the maximum levels that customers are willing to pay for the benefits they obtain from the product or service. Pricing has roots in the accounting numbers, but is in really much more a function of customer’s perceptions of a number of factors, including brand image, quality, and value for money. Note that we are referring to perceptions again, not to objective reality. Pricing decisions nearly always contain an element of subjective judgment; they will always be more than just a function of a business’s cost structure. It follows that pricing issues sit of a business’s cost structure. It follows that pricing issues sit firmly within the marketing section of your business plan. They do require some financial input, as we will see, but ultimately the pricing of a product or service relies on judgment, not science. That said, possessing a clear understanding of your business’s cost structure is essential and certainly allows better informed pricing decisions to be made.
Price Factors
A reduction in sales price will require a higher increase in sales volumes. In a price war situation where demand is essentially constant and therefore overall sales volumes cannot increase, the protagonists are simply reducing the overall amount of profit available to them. Businesses that use reduced prices alone to shore up flagging demand often find themselves in a downward spiral as they chase customers. There is rarely any certainty that sales will be stimulated enough to rise the extra volume needed to compensate, but customers’ fundamental expectations may change.
They may begin to expect ever lower prices. Consciously or unconsciously customers perceive that the balance of power is shifting from the sellers towards them as buyers. Customers find that they can retain more of the overall profit by negotiating shrewdly and quite possible by playing one supplier off against the next, making levels of price-cutting even more sever. The buyer’s gains matches sellers’ losses. If management is able to use marketing techniques to different the business’s offering, effectively looking customers, so that the actual fall in the volume of sales is less than that, them more profit will be the result. A reduction is price will definitely make lot of improvements in sales. Most of the business people are using this strategy to increase their sales volumes. Buyers also feel happy to buy products at low price. So make use of this marketing strategy and enhance your business.
Reducing Prices
A reduction in sales price will require a higher increase in sales volumes. In a price war situation where demand is essentially constant and therefore overall sales volumes cannot increase, the protagonists are simply reducing the overall amount of profit available to them. Businesses that use reduced prices alone to shore up flagging demand often find themselves in a downward spiral as they chase customers. There is rarely any certainty that sales will be stimulated enough to rise the extra volume needed to compensate, but customers’ fundamental expectations may change.
They may begin to expect ever lower prices. Consciously or unconsciously customers perceive that the balance of power is shifting from the sellers towards them as buyers. Customers find that they can retain more of the overall profit by negotiating shrewdly and quite possible by playing one supplier off against the next, making levels of price-cutting even more sever. The buyer’s gains matches sellers’ losses. If management is able to use marketing techniques to different the business’s offering, effectively looking customers, so that the actual fall in the volume of sales is less than that, them more profit will be the result. A reduction is price will definitely make lot of improvements in sales. Most of the business people are using this strategy to increase their sales volumes. Buyers also feel happy to buy products at low price. So make use of this marketing strategy and enhance your business.
Pricing Strategies Based upon Costs
The pricing of a product or a service must always have boots based in business cost structure. There are two pricing strategies commonly employed by businesses that are based upon cost levels: the cost-plus method and marginal costing.
Cost-Plus
The cost-plus method is exactly that a mark-up usually expressed as a percentage, added to the cost price of a product or service. This approach is commonly used in retail businesses, where standard mark-ups of, say, 100 or 200 percent might be applied. Cost-plus is simple method to understand, and is easily used, but it has inherent failings as a pricing mechanism in some situations. It does not, for example, take into account customer
Launch Pricing
For new businesses, and for new product or service lines, launch discounts and special promotions can play a key role as part of carefully formulated marketing strategies. Lower price are often set at launch in order to win market share. Care is needed, however, since re-building price levels to where they need to be in economic terms can present problems. If demand remains price sensitive, then the balance of power may have been moved to buyers from the seller and thus have a large detrimental effect upon long-term profit potential. There always exists an infinite level of demand for a free product or service that customers want, and so selling something too cheaply may also generate demand levels greater than your business can accommodate, and cause damage to your business
