SLC | S21W5 | Costs for entrepreneurs - Pricing
Hello 🤗 guys,
I welcome you all to the Steemit Learning Challenge season 21 week 5 on a contest organised by @yolvijrm & @adeljose which talks about Costs for entrepreneurs - Pricing. I'm going to be sharing my understanding on the said topic below as I try to attempt all the questions below.
| What is the importance of the pricing process? |
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The importance of pricing process can never be overemphasized as it holds great value with regards to venue, profitability, market positioning, and customer perceptions. Some of the major importance associated with pricing can be seen below.
Revenue and Profitability: With the help of pricing, a company can easily determine how much profit they make on a single product or service they sell. So with the help of pricing, a balance between the cost of production and profit made is clearly set.
Market Positioning: The price of the goods can communicate to customers if the product is of great quality or exclusivity. When a product has a high price it tells the customers that the product is a luxury or has a premium quality. Similarly when the price is low, it tells the customers that the product is affordable or efficient.
Customer Behavior and Demand: The behaviour and the demand of the product depends solely on price of the product. When the price is okay for customers they purchase the asset more. Changes in price of assets also influence the demand by customers.
Alignment with Business Goals: When the price of a product is in competition with others it helps to attract customers as the business tries everything to make it price affordable while still in profit. So when we have a lower price attached to a product and another has a higher price then customers go for the one with lower price since they are all of same quality.
Competitive Advantage: Every business looks out for Competitive Advantage where they will make their business stand out among others. So a pricing which stands out from others is one of the major key ways to obtain such.
Flexibility in Market Changes: For a business to stand out it must be ready adjust when there are changes in the market price due to inflation or recession and still offer price that consumers are will to buy.
Risk Mitigation: Pricing should not be set too high or too low to avoid risk of losing ones money from business or pursuing customers from patronising the products due to high price.
Enhances Customer Relationships: When you have a good pricing in your business customers tends to trust you and even when you increase or adjust prices they will understand based on you were never a cheat as you work with them from the very beginning in a clear and transparent manner.
| What aspects should be considered when establishing the price of a product or service? |
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In establishing the price of a product or service some key factors such as balancing costs, market dynamics, and customer expectations must be taken into consideration. So I will like to discuss with us some of the aspects to consider when establishing the price of a product.
Cost Analysis: One of the aspects that must be considered when establishing the price of a product or service is the different types of cost which are fixed cost, variable cost and also break-even point. Fixed cost as the name suggests are the cost that remains thesame despite changes in production whereas variable cost are cost that changes based on production.
Market Demand: Market demand involves the customers perception of the product, seasonality and many more. Price of the product must be in alignment with how customers see the product also the season as to when the product is mostly needed must be taken into consideration.
Competitor Pricing: Businesses must compare their prices with competitors who have same products or services this will enable them to make decisions of either increasing or reducing their prices to attract more customers and still make profits.
Target Market: Another aspect that must be consider when establishing the price of a product is the geographical location where the product is sold and also what the salary scale or income of your target audience looks like.
Business Objectives: The objectives of the business must also be taken into consideration. The business must start with low price to attract more customers first and later when the people are satisfied with the product price can increase as the customers may see it that it worth it since it is a good product.
Product or Service Characteristics: The characteristics of a product is very necessary for pricing. When the product has a good or high quality test then it becomes necessary for the price of the product to be high as it is seen as a high feature product.
| Provide examples of businesses that fit the pricing methods explained in class, stating your reasons. |
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The businesses that fit the pricing methods that was explained in the class which are Cost-Based Pricing Method, Demand-Based Pricing Method and Competition-Based Pricing Method (Fixation Pricing) are seen below.
Cost-Based Pricing Method: The entire cost of producing a product in addition to markup which helps to ensure that there is profit in the product is what we called Cost-Based Pricing Method.
Example of business that fit this pricing method is a local shop which prices are set on products based on the wholesale price used in the purchase.
The reason I feel that this pricing method fits into this category is because the traders focus on the purchase price adding a little profit to ensure that they are in profit and not in a loss.
Demand-Based Pricing Method: Here prices are adjusted accordingly to make demand and the willingness of customers to make payment.
Example of business that fit this pricing method is a Airlines and Hotels which prices are set based on the demand and the willingness of the customers. If there are many customers patronising then the price will increase as well.
The reason I feel that this pricing method fits into this category is because it is a seasonal business which sometimes have much demand and the location also matters.
Competition-Based Pricing Method (Fixation Pricing): This pricing method is done based on competition. Since there are people with similar products, you will want to increase or decrease price based on packaging and others to attract customers.
Example of business that fit this pricing method is a Telecommunications Companies which prices are set based on the different competition going on in the industries.
The reason I feel that this pricing method fits into this category is because there are many competition going on industry on data and many more so the business tries to provide the best of services to their customers.
| 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. |
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It is requested:
What should be the percentage of profit that should be added to a total unit production cost of $25.00 to achieve the desired profitability?
At what price should we enter the domestic market?
If the competition has a price of $28.00 for a product with similar characteristics, would it be possible to compete?
Solution:
Based on the data provided, it is possible to prepare a table showing the calculations necessary to answer the 3 questions above:
| Concepts and Relationships | Values |
|---|---|
| Investment made in machines (1) | 130,000 |
| Expected profitability (2) | 20% |
| Expected utility amount (3 = 1 x 2) | 26,000 |
| Estimated units for next year (4) | 21,000 |
| Expected unit utility (5 = 3/4) | 1.238 |
| Total unit costs of producing and selling (6) | 25 |
| Profit margin on costs (7 = 5/6) | 4.95% |
| Sale price (6 + (6 x 7) | 26.2375 |
From the calculations made it is concluded that:
The profit percentage to be applied to the total costs of the product is 4.95%
The selling price at which it should be released to the market is $26.2375
Since the sales price is lower than that of the competition, the desired profitability objective is being met and it is also competitive in the market.
I want to finally invite @josepha, @solaymann, and @suboohi to join the contest and share their entry if they haven't done so yet.