Setting Prices For Products is Challenging Job

ppruel By ppruel, 8th Nov 2012 | Follow this author | RSS Feed | Short URL http://nut.bz/34oiv4jw/
Posted in Wikinut>Business>Selling A Business

One of the most challenging jobs that you - a businessman - is to face is in setting price of your products or services. Here you would have to consider some factors that will influence on your pricing decisions, you would have to set prices using the different cost bases of cost plus pricing formulas, you would have to compute the percentage of mark-up based on the different kinds of costs.

Factors affecting pricing decisions

The author of the book Management Services 4th Edition Part 2, Ms. Luzviminda S. Payongayong– has sighted five factors affecting pricing decisions namely:

  • Customer Demand
  • Competitors Actions
  • Market Forces
  • Government Regulations
  • and Costs

It is said that in all phases of the business operations, the demand for a certain product or service by customers is of utmost importance because a business may cease to exist if it will not serve the need of the society or customer in particular. The reasons why many businessmen have to identify customer demand through:

  • market research
  • customer surveys
  • test-marketing programs
  • and take some feedback from sales people

In other words, business owners must provide the products its customers want at a price they perceive to be appropriate. If customers wanted high quality products, it is normal that business owners would have to set high prices for the high quality (HQ) products as well as low prices for the low quality (LQ) products if wanted by customers.

Competitors Actions

As said our time is on free enterprise and this allow competitors in every field of business. Competitors whether they are domestic or foreigners are striving so hard to sell their products to the same customers. Both would have to design products and set its prices at a competitive position. And because there is competition – both competitors must have to keep a watchful eye on each other’s actions.

Market Forces

There are industries where prices are determined entirely by the Law of Supply and Demand. But as observed more often, this rule of economics is being manipulated by the players – who are these players? They are the businessmen. If the competing firms or business owners who produced all of the same kind of products would adapt the so called cartel – the so called free enterprise will be ignored.

Government Regulations

In government regulations – the government interferes with the market forces. There are regulatory boards that can deregulate firms or industries which were previously under the price control law. Business owners are prevented to change their prices without prior approval of the government – and this result in the control of production and operating costs for business owners.

Effect of Costs

The effect of costs in price setting varies widely among industries and firms. Some business owners produced their goods with a higher fixed cost. High cost of production and operation would mean higher selling prices. Some of them will adapt the absorption cost pricing to compute the manufacturing costs of the product and used this as the cost base and provides for selling and administrative costs plus the target ROI (Return of Investment) through the mark-up.

Selling Price = Cost + Mark-up

To compute normal pricing and their normal formula. Selling Price = Cost + Mark-up. The mark-up is a certain percent of the base used. However, before you can determine the mark-up for the selling price of your products – first you would have to determine the cost as it is use as the base in computing the mark-up and could be based on the following factors namely:

  • Total full cost (manufacturing and operating costs)
  • Total manufacturing costs only
  • Total variable manufacturing costs only
  • Total variable costs (manufacturing, selling and administrative expenses)
  • And any other cost incurred by the firm used

Rate of return affects prices

As said, mark-up is a certain percent of the base used. The most common basis is the desired rate of return. Of course, there is no rule required as to the amount or percentage of mark-up. It is up to the business owners – they can apply starting from 20 percent, 30 percent, 40 percent and above. What ever rate the business owners will use – it would definitely affect price and ultimately the volume of sales at every given time.

Above is the screen shot to show and explain the given data on how to compute selling price based from the normal formula.

Selling price and Mark-up

Of course, businessmen (especially retailers) have their own ways how to compute their selling prices of their products. As most of them will target high return of their investments in every given time. So they would have to determine all the expenses incurred to be added to the original costs when they purchased the goods and would apply high mark-up in determining the selling prices of their products before selling them to customers.

Above is another screen shot that shows and explain the computation of the desired profit using the desired rate of return including the computation of selling price per unit, profit per unit and the mark-up percentage.

Another way of Selling price computation

Above is another screen shot (excerpted) that shows and explain the computation about unit cost and selling price per unit of particular product. The original unit cost was in EUR and it was converted to Saudi Riyals. At that time 1EUR was equivalent to 5.25 Saudi Riyals but it was rounded off to 6. So in conversion alone there was .75 halala (Saudi Riyals) gained. As you see the computation above – there were about 102% added to the original cost per unit plus 40% mark-up for selling price per unit.

Sources of facts and other info:

  • Management Services 4th Edition Part 2 by Ms. Luzviminda S. Payongayong
  • Fusion Boutique, Riyadh, Saudi Arabia by Ppruel

Read also my previous article: It is Not Yet Too Late to Detour

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Tags

Business, Businessmen, Competitor Actions, Costs, Customer Demand, Customer Surveys, Feedback, Government Regulations, Mark-Up, Market Forces, Market Research, Ppruel, Pricing, Pricing Formula, Profit, Pruelpo, Retailers, Selling Price, Test-Marketing Programs

Meet the author

author avatar ppruel
I am a web content creator, on-line marketer, products and services promoter, on-line writer and a Filipino blogger; I write about anything under the sun; making fun and socializing other Net users.

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Comments

author avatar Sivaramakrishnan A
8th Nov 2012 (#)

I will like to share a personal success story. I was working in a factory that was selling only domestically. The machines were hardly running one shift. Then I found out through exports the world market will help us out, but prices were not competitive. I made a cost analysis and went by marginal costing principles - cover the variable costs and set the export prices just above that. That meant we could run three shifts and even expand production facility. That made the factory run profitably. Thanks Paul for the share - siva

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author avatar ppruel
11th Nov 2012 (#)

Thanks for the share of your very successful story dude Siva. It shows that you're a business minded person and know-how to run it. Congrats.

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author avatar Robb714
10th Nov 2012 (#)

While very interesting article with lots of information, you did not mention the value of the currency as a major factor in the price of goods.

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author avatar ppruel
11th Nov 2012 (#)

Yes. Dude Robby the value of currency is one of the major factors to look at. However, on this article I did not focus on currency value as I thought it is already a self explanatory - beside every country has its own currency used. Example for this - I am the businessman from Philippines and you are the owner of the company selling electronic goods and your location is in the US - so you are selling your goods in dollar currency. One dollar is 41 pesos equivalent. The first two screen shots are in peso while the last screen shot there are two currency used: the EUR and Saudi Riyals. Every now and then the value of currency like EUR, $ and other currencies change. And businessmen should always consider them when doing business. Thanks dude.

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author avatar Rose*
21st Aug 2013 (#)

This is really helpful. So many businesses underprice thinking they'll raise prices later but find they can't

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