Hi everyone, I'm glad to participate in the 5th week of this great learning task related to pricing strategies and the importance of setting up an appropriate price for your business. So let's get started

What is the importance of the pricing process

In my opinion, pricing process is one of the most significant element of the business strategy because it directly affect the financials and market positioning of the business.

Pricing also help a business to easily adapt the dynamic market conditions, in perfect competition markets businesses need to set pricing strategically to retain customers, increase their market share, pricing not only affect the revenue but also make the business to align with their objectives such as market penetration, customer loyalty or perhaps brand reinforcement.

Pricing also impact the value perceived by the customer for your product or service. For Example - A high price position in the market may show that your product or service is exclusive and quality which will attract premium customers, on the other hand if you set up low price it will be shown as an alternative option which is affordable for price sensitive customers.

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

There are various internal and external that need to taken into consideration before establishing a price for your product or service -

• Cost Structure - One of the important aspect is getting a clear understanding of your fixed costs such as rent, salaries and utilities and variable costs such as raw materials, shipping etc cost which fluctuate with the level of production. The appropriate pricing should cover all costs and include a profit margin.

• Market analysis - A thorough study of industry is a must do for any business, it refers to understanding the demand trends, behavior of the consumers and the pricing of the competitors. To set up your pricing understanding all these factors is essential as you will get deeper insights into the industry.
  Considering the example of a perfect competition - If you set up your pricing too high you will lose customers and if you set your price lower you may earn profit in the competitive market.

• Target Audience- As we all know different customers has different needs, tastes and preferences even the value perceived by them varies. The pricing must reflect what your target audience is willing to pay for your product or service. It includes getting an understanding of several factors of your target audience such as income level, brand loyalty, lifestyle etc.

• Brand position - It is an important factor because the price reflect the positioning of your brand in the market, if you are setting up higher price then It will reflect exclusive, premium brand and target users with higher level of income, on the other hand if you set a lower price it will reflect affordability, availability and attract the customer with lower income level.

Note - There are many other factors that business should consider such as Economical environmental conditions, business goals, demand and supply etc

Examples of businesses and pricing methods

Cost - Based Pricing

This type of pricing strategy is good when there is customization in the orders, in this method we need to calculate cost of raw materials, labor per hour cost and other overheads. For better understanding we will understand it with an example of a cake bakery

In the local bakery to get the cost of a customized order then, the baker will calculate the cost of ingredients such as flour, sugar, butter etc, also fixed costs such as electricity, rent etc and add the profitability let's say 20% to total cost of production.
So if the variable and fixed is 100$USD then business can sell it for 120$ To earn 20% profit.

Demand - Based Pricing

This type of pricing is dynamic as it changes with the demand of the product or service based on multiple factors such as market environment, seasonal variations.
For a better understanding we will take a example of an airline business.

During holidays seasons, the ticket prices of airlines generally increases due to higher demand, on the other hand during the off season you will find great discounts on travelling with plane. As because of this demand based pricing strategy the business is able to maximise it's revenue during both on and off seasons.

Competition - Based Pricing

In this strategy, the price is based on the price of your similar competitors who are selling similar products or service. For a better understanding we will take the example of retailers on mobile companies.

When they launch a new smartphone, the price is highly similar to the price of competitors products with similar features and specifications to ensure that their product is in the range of their target audience and remains attractive for them to purchase.

Case Study Solution

Given Data:

• Equipment investment - $130000
• Expected Return - 20%
• Units to be sold - 21000
• unit product cost - $25
• Competitor price - $28

Case Study Solution on Excel Sheet

Step 1 - Percentage of profit to add

Expected profit = Investment X Expected Return
130,000 X 0.20 = 26,000

Profit per unit = Expected profit/Units
26,000/21000 = 1.24

Profit % (Profit per unit/unit cost)X 100
(1.24/25)X 100 = 4.96%

Step 2 - Market price

Selling price = Unit cost + (Unit cost X Profit %)

25+(25 X 0.0496) = 26.24

Step 3 - Competitor price

The competition price is 28$, While our calculated price is $26.24

So as our company price is lower than competitor price we can use this as our advantage and get more customers increasing sales and more market share.. Which will ultimately make your business market position strong.

I invite my friends @ahlawat @senehasa @awesononso