SLC | S21W5 | Costs for entrepreneurs - Pricing
What is the importance of the pricing process?
The pricing process is a key step to guarantee the sustainability and profitability of a company since it is not limited to covering production and distribution costs but also represents a strategic lever that directly influences the position of the company in the market by setting an adequate price allows consumers to meet their expectations while ensuring a sufficient profit margin to finance future operations, investments and developments. It is essential to consider things such as fixed costs, such as salaries and rent and variable costs, such as raw materials and transportation to ensure that the business does not incur losses, at the same time pricing plays an important role in customers' perception of value, as a price deemed too high can inhibit purchases while a price that is too low can give the impression of lower quality, thus affecting competitiveness and brand image.
Beyond financial aspects, pricing also serves as a strategic tool to achieve specific objectives, whether it is entering a new market with competitive prices, maximizing profits over a given period by adjusting prices based on depending on demand or to build customer loyalty by maintaining attractive and consistent prices, then a good pricing strategy also makes it possible to respond effectively to competition by positioning the product advantageously in its segment. Moreover, in a constantly changing business environment, where customer expectations change rapidly, pricing must be dynamic and regularly adjusted to adapt to market trends and challenges. Thus, far from being a simple accounting operation, the pricing process is a complex and multidimensional approach that directly influences the overall performance and long-term success of the company.
What aspects should be considered when establishing the price of a product or service?
Setting the price of a product or service is based on several essential aspects which must be analyzed in depth in order to guarantee the viability and competitiveness of the company, firstly taking into account production costs which include fixed costs such as rents, salaries and insurance which remain constant regardless of the volume of production as well as variable costs such as raw materials, labor and transport which vary according to the quantities produced and must be accurately evaluated to ensure the price covers expenses while generating an adequate profit margin.
At the same time, the study of the market and competition is essential because it consists of analyzing the prices charged for similar products or services which allows the offer to be positioned competitively while highlighting its specificities and determining whether a higher price is justifiable by quality or unique features or if a low pricing strategy is necessary to attract a greater market share.
Customer perception of value is also a key element that must be considered as it depends on many factors such as brand positioning perceived quality market trends and product availability which means price must reflect not only costs and competition but also the image that the customer associates with the product or service offered. This perception has a direct influence on the willingness to pay and therefore on the commercial success of an offer on the market, as well as a dynamic pricing strategy and adaptable is necessary to meet changing needs and expectations consumers while enabling the company to maintain its competitiveness and adapt to rapid market changes.
Provide examples of businesses that fit the pricing methods explained in class, stating your reasons.
An artisanal soap making business perfectly illustrates the cost-based pricing method because it focuses on accurately calculating expenses related to raw materials like essential oils and foaming agents, specific packaging needed for product presentation and labor involved in the production process and adds a fixed margin to ensure a profit this approach is ideal for local production where costs are well controlled and the objective is above all to cover expenses while generating a profit sufficient profitability to maintain the activity.
A car rental company represents a relevant example of demand-driven pricing because it adjusts its prices dynamically based on season, local events and fluctuations in demand as well as during holiday periods when demand for vehicles is higher prices increase to reflect the scarcity of supply and maximize revenue. This method relies on the ability to identify consumers' willingness to pay more when the service becomes essential.
A sports clothing brand is a good example of the competition-based method because it constantly monitors the prices charged by major brands like Nike or Adidas to adapt its own prices while promoting distinctive elements such as the use of ecological materials or exclusive designs this strategy allows the brand to maintain competitiveness in the market by aligning itself with consumer expectations while highlighting characteristics that justify price differentiation this approach is particularly effective in sectors where products offered by the various brands have similarities in terms of quality and features but where customers' perceived values and preferences directly influence their purchasing decisions.
The company Steemians invests $130,000 in the equipment needed for its production to enable the production and subsequent sale of the new product. A return of 20% on the value of the investment is expected. The expected sales level for next year is 21,000 units.
The data provided for this case is used to establish a competitive pricing strategy while ensuring the profitability of the company, here are the main calculations explained:
- Total investment: $130,000
- Expected profitability: 20%, which gives a total expected profit of ( 130,000 \times 0.2 = 26,000 ).
- Expected sales: 21,000 units.
- Total unit cost: $25.00.
- Expected unit profit: ( 26,000 / 21,000 =approx 1.24 ).
- Profit percentage to apply: ( (1.24 / 25) * 100 =approx 4.96 % ).
- Recommended Selling Price: ( 25 + (25 * 0.0496) =approx 26.24 ).
| Description | Values |
|---|---|
| Investment | $130,000 |
| Expected Profitability (%) | 20% |
| Expected Total Profit ($) | $26,000 |
| Expected Sales (Units) | 21,000 |
| Total Unit Cost ($) | $25.00 |
| Expected Unit Profit ($) | $1.24 |
| Profit Percentage (%) | 4.96% |
| Recommended Selling Price ($) | $26.24 |
| Competitor Price ($) | $28.00 |
The recommended retail price of $26.24 remains below the competitive price of $28.00, providing an opportunity to attract price-sensitive customers while achieving desired profitability, this strategy also helps demonstrate increased competitiveness, particularly in a market where value for money is essential to capture market share.
This graphic compares the different pricing elements:
Unit Cost: $25.
Expected Unit Profit: $1.24.
Recommended Retail Price: $26.24.
Competitor Price: $28.00.
.png)
Through accurate pricing, the company can offer an attractive price while ensuring profitability the table and graph demonstrate how each element of cost and profit contributes to the final price by providing transparent analysis to support strategic decisions.
Thank you very much for reading, it's time to invite my friends @sahar78, @stream4u, @fombae to participate in this contest.
Best Regards,
@kouba01
