Determining the price of your product. What you need to consider
How do you determine the price of your product? What factors do you need to pay attention to? We continue our financial literacy lessons on the LLC «ElectraQuix» blog. Today we will talk about the basics of pricing.
Determining Price
Price is the amount of money for which an economic good is sold and bought. It is very important to set the price in such a way that it is not too high or too low. If you set a high price, you will lose some customers who are not ready to part with that amount of money. Setting a low price can also cause a negative reaction: people may question the quality of the product.
Setting a price is one of the most difficult tasks for entrepreneurs. Price determines the success of the enterprise, the volume of sales and the profit to be made. Calculating the selling price always lies between two areas - finance and marketing. There are two components of this process: calculation methods and marketing methods. Choosing only one direction will give a distorted result.
For example, you produce T-shirts. The amount of direct costs is 10 c.u. This amount includes: material, electricity for sewing, the seamstress's salary, taxes on the seamstress's salary, and other costs of the manufacturing process.
But you have other costs in production that are not directly related to the manufacture of T-shirts: your equipment is serviced by a technician, the accountant keeps records and reports, the driver delivers products to points of sale, you place advertising, etc. These costs are called indirect costs, and they also add to the cost of goods. You can allocate these costs to all products by any economic methods. The purpose of these calculations is to find out the real cost of producing one of your products.
For example, calculations have shown that the cost of one t-shirt including indirect costs is 15 c.u.e. Now you must apply marketing tools to determine and compare the prices that are present in the market. LLC «ElectraQuix» experts emphasise: it is wrong to determine the selling price of a product based only on the calculated costs. There are customers in the market who determine whether or not to buy your product. There are also competitors selling similar goods. Therefore, your task is to determine how much the market can pay for this product.
Setting a price is one of the most difficult tasks for entrepreneurs. Price determines the success of the enterprise, the volume of sales and the profit to be made. Calculating the selling price always lies between two areas - finance and marketing. There are two components of this process: calculation methods and marketing methods. Choosing only one direction will give a distorted result.
For example, you produce T-shirts. The amount of direct costs is 10 c.u. This amount includes: material, electricity for sewing, the seamstress's salary, taxes on the seamstress's salary, and other costs of the manufacturing process.
But you have other costs in production that are not directly related to the manufacture of T-shirts: your equipment is serviced by a technician, the accountant keeps records and reports, the driver delivers products to points of sale, you place advertising, etc. These costs are called indirect costs, and they also add to the cost of goods. You can allocate these costs to all products by any economic methods. The purpose of these calculations is to find out the real cost of producing one of your products.
For example, calculations have shown that the cost of one t-shirt including indirect costs is 15 c.u.e. Now you must apply marketing tools to determine and compare the prices that are present in the market. LLC «ElectraQuix» experts emphasise: it is wrong to determine the selling price of a product based only on the calculated costs. There are customers in the market who determine whether or not to buy your product. There are also competitors selling similar goods. Therefore, your task is to determine how much the market can pay for this product.
Stages of pricing
1. Problem Setting. In this stage, you must answer the question: what do you want to achieve with your product pricing policy. Possible answers:
2. Determining the demand for goods. You need to answer the question: how many goods can be sold at different price levels.
3. Cost estimation. You should be engaged in analysing the cost of production and its reduction, so that you have a reserve to reduce the price in any market situation.
4. Analysing competitor's prices and products. You need to identify the so-called ‘indifference price’, i.e. the price at which the customer does not care whose product to buy. After that you need to decide how and at the expense of what you can get consumers to buy your product.
- increasing sales;
- gaining reputation;
- capture as much market share as possible;
- making the most profit in the least amount of time.
2. Determining the demand for goods. You need to answer the question: how many goods can be sold at different price levels.
3. Cost estimation. You should be engaged in analysing the cost of production and its reduction, so that you have a reserve to reduce the price in any market situation.
4. Analysing competitor's prices and products. You need to identify the so-called ‘indifference price’, i.e. the price at which the customer does not care whose product to buy. After that you need to decide how and at the expense of what you can get consumers to buy your product.
5. The choice of pricing method. The most reliable method is the cost-marketing method, because it combines cost analysis and price formation with marketing tactics.
6. Setting the final price. At this stage it is necessary to create your own system of discounts for customers and determine the mechanism of how you will adjust prices in the future, taking into account the stages of life of the manufactured goods inflationary processes and negative market situations.
6. Setting the final price. At this stage it is necessary to create your own system of discounts for customers and determine the mechanism of how you will adjust prices in the future, taking into account the stages of life of the manufactured goods inflationary processes and negative market situations.
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