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* Getting the product accepted.
* Maintaining market share as competition grows.
* Earning a profit.
You have three strategies to choose from:
• Penetration: The idea is to gain quick acceptance and extensive distribution in the market. You introduce your product at a low price. The low profit margins may discourage other potential competitors from entering the market with similar products.• Skimming: The idea is to set a price well above the total unit cost and to promote the product heavily in order to appeal to the segment of the market that isn't sensitive to price. This technique often reinforces the unique
, prestigious image of a shop and projects a quality picture of the product.
• Sliding - down - the - demand - curve: You introduce a product at a high price until technological advancements enable you to lower your costs. The art is to reduce the product's price sooner than that of your its competitors. Computer price declines are a good example of this technique.
Setting the Price
In this section, we will explain the process of setting the price of your product/service, by the use of two case studies. The one is for retailers and the other for manufacturers.The retail case study:
The initial mark-up is the average mark-up required on all merchandise to cover the cost of the items, all incidental expenses, and a reasonable profit.Initial dollar mark–up = (operating expenses + profits) ÷ net sales
Sales of R400 000, expenses of R120 000 and a profit of R80 000 are expected in your business. The initial mark up % therefore = (120 000 + 80 000) ÷ 400 000 = 50%
You must verify your retail price by answering the following questions:
• Will it cover costs and generate the desired profit?
• Is it in line with the company's overall price image?
• Is it within an acceptable price range?
• How does it compare with the prices charged by competitors? • Are the customers willing and able to pay this price?
The manufacturing case study
The most commonly used pricing technique for manufacturers is cost - plus pricing. This method is also known as absorption costing. Using this method, the manufacturer establishes a price composed of direct materials, direct labor, factory overheads, selling and administrative costs, plus the desired profit margin. Let’s look at Benny’s business:
Benny manufactures tables.
His monthly operating figures are:
• Rental for the factory = R5 000
• Raw direct materials used = R11 000
• Wages of workers = R20 000 (The workers are paid per table manufactured)
• Telephone = R800
• Salaries = R16 200
On average 2500 tables per month are manufactured and sold. Benny intends making a 25% net profit.
Direct or variable costs = Direct materials + Wages
= R11 000 + R20 000 = R31 000
Admin or fixed costs = Rental + Telephone + Salaries
= R5 000 + R800 + R16 200 = R22 000
Total costs = Variable costs + fixed costs
= R31 000 + R22 000 = R53 000
Profit margin = 25% on total cost
= 25% of R53 000 = R13 250
Selling price = Total cost + Profit margin
= R53 000 + R13 250 = R66 250
Selling price per table manufactured = R66 250 ÷ 2 500
= R26,50
The service business
The typical service business can benefit from effective pricing techniques, but too often small businesses simply charge the going rate or they set a price they deem suitable for the specific set of circumstances.A service business generally establishes a price based on the materials used to provide the service; the labor employed an allowance for overheads, and a profit. They charge customers on an hourly basis, usually the actual number of hours required to perform the service.
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