Friday, April 8, 2022

How do you choose the right price for the product?

Price plays an important role in the success of the company's products, and may represent the difference between success and failure, as the choice of a high price for the product means the reluctance of consumers to buy it, and therefore the decline in the company's sales, and the decline in profits, as the choice of a low price means the inability of the company to cover the costs, and in both cases the company will fail, so it was necessary to discuss how to determine the appropriate price that suits both the company and its customers.


Means of determining the price

Price fixing is based on a number of factors, such as cost, demand, competition, value, or a mixture of these factors, and many marketers are aware of the importance of taking all these factors into account, but pricing is still an art, and the means of determining price can be classified to:

(1) Cost pricing 
(2) pricing by demand 
(3) pricing in value.

Pricing by cost

Cost pricing, sometimes called gross profit margin pricing, is one of the most price-fixing methods used by marketers, and this method seeks to achieve a certain margin of gross profit, by adding a profit margin on the cost of the product, and the profit ratio ranges from one product to another, the gross profit rate in a product may be 48% and may reach 33.5% in another product and may be only 2% in another product.

The main reason for the popularity of this method among marketers is that they do not need to anticipate the volume of demand among consumers, or business conditions in general, but if the expectations about sales volume are accurate, the company will succeed in achieving the desired objectives, and consumers believe that this method is fair, fair, because the price they pay is directly related to the cost of producing the product, and similarly this method allows marketers to ensure that all costs are covered.

However, this method has a major drawback, namely, the lack of flexibility, for example: public stores face great difficulty in competing with discount stores, because of their commitment to the cost pricing strategy, and the disadvantages of this strategy are also that they do not take into account consumers' perception of the value of the product, and production costs may fluctuate, but the company cannot change the prices of its products continuously.

When brokers use the term profit margin, they usually refer to the difference between price, average cost, for all goods in stores, for a specific section, or for a particular product, and may express the difference in numbers, or ratios, for example: the cost of a men's tie is $4.60, They are sold for $8, so the profit margin in this case is $3.40, while the profit margin represents 74% of the cost (3.40/4.60) or 42.5% of the retail price (3.40/8).

There are many reasons to use the sale price, rather than the cost in determining the percentage of the profit margin, such as that the sale price contains many other data, for example: sales costs, if the cost of sale is 8%, the cost of selling per $100,000 of net sales is $8,000. In addition, advertising costs, operating costs, and therefore the sale price is used to calculate the profit margin ratio, to facilitate the balancing of all expenses and other costs.

Brokers receive new goods every day, sell other goods, and with receipt of each new shipment, brokers specify the profit margin assigned to them and put them in stores, and use the term cumulative profit margin, to find the difference between the value of all goods entered into the stores, and their price over a specified period of time, while the original profit margin specified when the first products were placed in the stores is indicated by the initial profit margin.

The concept of continuous profit margin is necessary to estimate operating profits, and an important indicator of the efficiency of the company's business, sometimes called the total cost of goods, and it expresses the difference between the sale price of all products on the one hand, and their monetary cost on the other, without calculating deductions, and the continuous profit margin is usually lower than the initial profit margin, due to price reductions, the possibility that goods in stores can be stolen, damaged, etc., and the continuing profit margin is necessary, especially in seasonal Lyons, which are significantly lower than the seasonal price margin at the end of the season.

Although this pricing method is simple, it has significant advantages, but the problem facing the managers of many companies, such as food stores, is the need to price a large number of products, constantly change their prices, and it can be said that a good profit margin is the one that helps the company to price, and achieve a reasonable margin of profits.

To illustrate the cost pricing strategy, she ponders the following example: suppose a company sells a product for $30, how did you set this price based on the previous strategy?

$5 Production cost + $2.50 Advertising cost + $3.11 Distribution cost + 4.39 taxes + $7.50 profit margin (for the retailer) + $7.50 net profit (for the company).

Costs are an important factor in determining the price, as no company can make profits before it covers its costs, however, the cost pricing method does not take into account the willingness of the customer to pay the specified amount, and as a result of this strategy, many companies add multiple advantages to their products, which increases their cost, and when the product is finished, the company also adds its profit margin to the cost of production, but is ultimately surprised that customers are not willing to pay the specified amount.

Analysis (break-even point)

The reform, the use of the "e-waste" method is not only a "waste of time" but also a "price", but also a "price", which is not the result of the use of the "price" of the product.

However, it should be noted that the total cost is divided into fixed costs, variable costs (total cost = fixed cost + variable cost). Fixed costs do not change as the level of production changes upwards, or downwards, and the rental of the company building is an example, and it can be said that there is no fixed cost in the long run, but in the short term, many costs are consistent, and the variable cost is those that change as production increases or declines, for example the cost of raw materials for product production.

However, what is wrong with the method of analysis (break-in point) is that it assumes that variable costs are stable, and also assumes that costs can be easily classified into constant, variable.

Rate of return

Pricing through (break-in point) is a logical method, especially when the company seeks to achieve a certain rate of revenue, given its limited production capacity. Suppose, for example, that the company described in the previous example cannot produce more than 10,000 units of product during the subsequent period, and that the company seeks to make a profit of 20% above the total cost, return to the company's internal accounting records, and study variable production costs at similar production levels. The company was able to draw a new curve for total costs, and then decided to operate 80% of its production capacity, i.e. producing only 8,000 units, after which, using the curve, the company estimated that the cost of producing 8,000 units was $18,000, It then added a profit margin of 20%, i.e. it added $3,600, producing $21,600 divided into 8.00 units, so the resulting unit price is $2.70, but the disadvantage of this method is the absence of any information regarding the size of the product demand, given the price specified, as well as the assumption that all units will be sold at this price.

Therefore, this method should be enhanced by more information about consumer views on the price set, and this information can be collected through research, consumer surveys, as well as a study of the pricing practices of competitors in the same field, and despite the disadvantages associated with pricing (break-point), as well as pricing at rates of return, these methods are very common.

On-demand pricing

This method focuses on the nature of the product or service demand curve, which is greatly influenced by the nature of competition in the market, and if the company's business area is highly competitive, price can be used to achieve the strategic advantage of acquiring and maintaining a market share, and in turn, if the company's working environment is limited to a few other competing companies, the price disparity will be minimal.

  • Pricing in value

If you look at the three ways of pricing, you will notice that cost pricing focuses entirely on the company's point of view, without showing much interest in the customer, demand pricing, consumer-focused pricing, but as a factor in predicting sales, and pricing in value is fully focused on the consumer as the most important factor in determining the relationship between the total price and value, and marketers define pricing in value as Moreover, this method takes into account a number of marketing and price facts, as follows:

For consumers, the price is the only annoying part of the purchase process.

  • Price is the easiest marketing tool to be emulated, imitated.

  • The price expresses everything related to the product.

Although pricing is focused on customers, it does not mean that the company incurs losses to satisfy its customers, as this method requires answering two basic questions:

(1) What is the highest price a company can sell through?

(2) Is the company ready to sell at this price?

To answer the first question, two basic factors must be taken into account: customers and competitors, and the answer to the second question depends on two other factors: costs and constraints.

Many consumer-related factors play an important role in value pricing, for example: marketers must understand the purchasing process among customers, and know the following:

How important is the price to them? When do they study the price? And how do they use it? The cost of switching from one product to another, and from one brand to another, is also an important factor. How much does a customer expect to pay for a large pizza? Or a colour TV? Or a DVD player? Or a newspaper? Or a pool? Customers' expectations can sometimes shock them when they know the real price of the product.

The second factor influencing pricing in value is competitors, i have known in previous chapters that identifying competitors is not always easy, as i have also learned the concepts of higher, lower, or equal pricing, and although competitors in the same category, such as Toyota and Nissan, are easily identified in the automotive industry, indirect competition may also affect the perception of prices, for example, Customers may balance the cost of eating abroad, the cost of buying vegetables, preparing food at home, and, in some cases, the leading company dictates the price to all other competitors, for example, Tannhauser determines timber prices, while Kellogg determines grain prices.

If you are seeking to go out for a walk, you can calculate the costs of the required items relatively easily, but for global companies, calculating costs is very complex, for example: calculating marginal costs, avoidable costs, and limit costs are defined as the cost of producing each additional unit, and if marginal costs begin to exceed marginal returns, this is a clear indication of the need to stop production, and the costs that can be avoided, are unnecessary costs, such as benefits that the customer does not use in the product, or Those costs can be passed on to third parties in the marketing channel, as some banks do when certain costs pass to their customers.

The cost of opportunity is also an important factor in value pricing, for example: a company may not be able to offer a discount on products, as it has spent its money on redesigning the store. Finally, costs vary from market to market, and from quantity to quantity, so differences and differences must be constantly assessed.

It is true that the company has the freedom to choose the price that suits it, but this is not always true, as there are many restrictions that limit this freedom, such as formal, such as government restrictions on certain strategies, such as: two or more companies agree ing prices, such as informal ones, such as: the desire to keep up with competitors' prices, the existence of a traditional price, and the customary price of the product, as well as the desire to impose a price to cover the expected costs.

Here are three recommendations for using value pricing in an effective manner:

Deal with price by segmenting the market, according to criteria such as: type of consumers, geographic distribution, and demand volume.

Ask for the highest possible price, and justify it by offering an equal value.

Use the price, mainly, to establish strong relationships with your customer.

Future pricing

Pricing decisions have always been subject to economists and financial analysts, and although achieving a reasonable amount of profit is still very important, pricing must become a strategic marketing component, and smart pricing, as described in the value pricing strategy, seems to reflect the future of future pricing. In 2000, ford Motor, for example, made a profit of $7.2 billion, more than any other car company in history, despite its declining market share, and while sales of low-profit vehicles, such as Escorts and Aspires, declined and recorded the sale of 420,000 cars, sales of high-profit cars, such as Crown Victorias and Explorers have risen to 660,000. Ford has reduced the price of the most profitable cars, increasing demand, but has not significantly reduced prices, and has maintained a reasonable profit margin.