Essential factors to consider in product pricing
I was very naive pricing my first book “Practical Clues For Effective Business and Organisational Management”. Based on the quality, size and features of the book, and on my own assessment with others in the market, I’d wanted to sell it at the same price on the market. If I had priced it above the market equilibrium price, it would have been difficult, even selling a copy.
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Well, what I did was to sell some copies lower in some book shops and others at the prevailing market price per the book’s standards. If I had sold it lower, because I had wanted to sell copies faster, I would have lost big. It would have been difficult to break-even and recover my printing cost.
Yes, so that’s the kind of dilemma businesses go through when launching products out there to sell. This is because business owners do not know what to consider before pricing out their products.
Though price is determined by demand and supply, it goes beyond that micro-economy level. For businesses, both long-term and short-term goals are to be achieved only when total revenue and or profit exceed total cost of operation.
It is through that survival, market share and shareholder’s wealth can be realised. If the cost of doing business should always outrun sales revenue or turnover, then there would be the need to turn attention to where the cost-benefit analysis would favour a position run on the trading, profit and loss account.
For losses in the short-term, particularly when the businesses are in their initial growth stages, at least such can be accepted and included as part of the running cost but should immediately be reversed, if management wants to grow and reach the maturity point so desired.
Of the7p’s in marketing; that is the product itself, price of the product, place to sell the products, the people to buy, promotion, process of selling the product and the physical presence of the product; price, rightly being one of the important aspects in business, have much influence on how a product or service will fare in the market, hence the product’s profitability.
In this regard, one would think that then there should be an accurate standard in place to price specific good or service, but surely that’s not the case. There are indeed several conditions in the market that determine how goods and service should be priced.
The production cost
Essentially, the unit cost incurred in producing and distributing what is to be sold, should determine what price to tag a particular item to be placed on the shelves. Intuitively, no company can make gains by selling just at the same cost price. Management must, therefore, factor in the cost of raw materials, direct labour expenses, overhead expenses, administrative and service costs in terms of transport and deliveries, guarantees and marketing expenses, such as publicity and the commissions of sales personnel.
Hence, before the pricing is done, a compilation and the analysis of all these inputs regarding the cost of production ought to be completed before pricing any unit per item for the intended market.
Demand for the product
Management, in their mission to meet long-term stability objectives and maximize profit, must first find out through a survey if a particular product is desired and would command demand.
Products considered as luxury or necessity must be borne in mind in this direction as their nature also tells whether they will be demanded in particular markets and at certain times of the season. Once management gets to know all of these, products with high demand can be priced high while those with less demand can be priced low so as to meet balance sheet requirements.
Price of competitors
It is very necessary considering what your peers are offering in terms of price as you intend selling similar products in the market. This invariably should guide you in pricing what you want to offer. Remember to either sell at same price or a little above the equilibrium price. Bear in mind your quality, size and benefits are surely beating the ones in the market. But note, never attempt to sell at a cut throat price.
Customers’ purchasing power
It doesn’t need mathematics to figure out what price to offer, if the propensity to buy is low or high. A consideration as to pricing a product high or low should depend on the abilities and the capabilities of the customers in question whether they can afford to buy or not; be it luxury or necessity. Once the purchasing ability of a particular people or market is known, management shouldn’t find it difficult pricing their goods and services in specific markets.
The profit motive
In our first consideration, we thought of cost. But breaking even, we must soar above the fixed costs and the variable costs. Thus, making real gains. This is what actually motivates business ventures.
It is of no use being stagnant. No charity when we need to be consistent in our approach in satisfying shareholders objectives, enjoying dividends and ensuring our prosperity as well. So definitely, thinking above cost in how much more money we want to have, apart from breaking even, should also be factored in when pricing.
Well, by giving it a thought, it should be more than just mere guess work. Some mathematics, business experiences and the willingness to consider these factors to audaciously price our products strategically, in order to earn the benefits we envision, should be paramount in setting our business agenda.