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What is the importance of the pricing process?

In a business venture, the pricing process or regime is one to be taken very seriously due to its importance in the overall importance of the business strategy. However, there are some basic importance of the pricing process, and they include;

1. For Revenue Generation:
   This is one of the basic reasons why we engage on pricing process. To enable us generate a profitable revenue at the end of the day. If the pricing is wrong, we may have problem with company profitability and when the pricing is right, sales volume is increased which means more inflows.

2. For Brand & Market Perception
   Pricing brings class and luxury to a brand. Customers tend to assess products based on their pricing. This is what differentiates the same products of different compaines.

3. For Cost Recovery Mechanism
   The pricing regime tend to help capture the cost of investment made in making a product available. All investments made in bringing alive a product is captured during pricing process.

4. For Decision-Making and Planning
   This helps us to make effective planning and adequate resource allocation to needed areas. Bussiness can now plan ahead with the pricing regime followed.

5. For Regulatory Compliance.
   Each region or country have their pricing regulatory guidelines and this process help us to work in line with stated procedures.

We have to understand that the regime of pricing process goes beyond fixing figures to products but rather understanding market and consumer behaviour. This quickly translates if we are over or under-pricing.

What aspects should be considered to establish the price of a product or service?

In establishing the price of a product or service, we have to consider the following aspects;

1. Cost of production
   This is one important aspect we have to take into consideration. We have fixed cost that include cost for attending to rent and salaries, and also variable cost which is cost from purchases used on eae materials and other indirect expenditures.

2. Market Demand
   This is another critical area that needed to be handled with care. This is where demands definitely would play a vital role in determining the price ofna product. We should know that when there's high demand for a product, price tend to move up.

3. Competition Factor
   Competition factor is a guide to price fixing expecially for similar products. We do not need to tilt our price so much above exist competiton price to give room for initial market acceptance.

4. Customer & Value Perception
   A good understanding of how customers sees our product isna determinant to product pricing. We have to always launch out strong when launching our product for the first time.

5. Target Market
   We cannot be targeting the rural markwt and want so much of a product price. The age and income status are vital determining factor in this regards. Their overall lifestyle pattern should determine their expenditure path and hence consideration to product pricing.

6. Economic Factors
   During times of inflation and hardship, the spending or purchasing power reduces, hence, the product pricing should take this into consideration by aligning to present economic times.

7. For Regulatory Compliance.
   Each region or country have their pricing regulatory guidelines and this process help us to work in line with stated procedures.

Other aspects we have to consider include marketing strategy, logistics,.and profit objectives. Product pricing is a serious business and this holistic approach should be considered.

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Set business examples that fit the pricing methods explained in the class, indicating your reasons.

For the Cost-Based Pricing method, we already know of this system's involvement of the entire investment put in for the purpose of determining product pricing.

A typical example of this business type, is a scenario I have discussed with an SME business individual. She produces snacks for my office in doing so, she provides egg roll, peanuts, meet pie, and doughnut. When we argue of the product pricing, she will say the cost of her product is dependent on the price of raw materials. She calculates the rising cost of raw materials due to inflation, in determining the product pricing.

For Demand-Based Pricing Method, this is influenced by demand elasticity. The demand and perception for this product is a vital determinant of its pricing.

A rypical example of this, is a bakery that was launched in a commercial town where quality bread production was scare. They came in, and their demand for this bread and positive perception for this product, determined its pricing. However, the pricing does not go below the universal cost of production.

The Steemians company makes an investment in equipment necessary for its production, which amounts to $130,000 to enable the production and subsequent sale of the new product. A return of 20% is expected on the value of the investment. The expected sales level for next year is 21,000 units.

It is requested:

• What should be the percentage of profit that should be added to a total unit cost of production of $ 25.00 to achieve the desired profitability?
• At what price should the domestic market be released?
• If the competition has a price of $ 28.00 for a product with similar characteristics, would it be possible to compete?

Solution:

For desired profit
Stated investment Amount - $130,000
ROI - 20%
Anticipated Profit - 130,000 x 20% = $26,000

Profit per unit
Expected sales target - 21,000
Profit for every unit sales - 26,000 /21,000 = 1.24

Total Unit Cost
Unit production cost - $25
Therefore total unit cost with profit: 25 + 1.24 = 26.24

To enter the domestic market, this would be the product pricing [26.24].

*** Percentage of Profit***
This is achieved by: (profit per unit/total cost unit) x 100%
Therefore, (1.24/25)x100 = 4.96%

Competitive Product Breakdown
Given competitors price - $28
Steemians Price - $26.24

In summary. Steemians can favourably compete since their entrance product pricing is lower that competitors price. If they continue with this price or tilt it above but still lower thacompetitors'rs price, it will allow for business profitability.