Course for Entrepreneurs - Pricing

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Welcome to another exciting day on my blog! Today I am participating in a learning challenge on pricing. I will endeavour to tell you all I know and to explain it in simple terms.

I am inviting @eliany, @goodybest and @bela90 to participate in this great learning adventure.

What is pricing?

Pricing is the process used when determining what the optimal price for a product or service offered to customers should be. It involves striking a balance between an amount that meets the business' profit need and the customer's willingness to pay

What is the importance of the pricing process?

Due to it having a direct impact on revenue, profitability, and the way customers view the product or service, pricing is very important to businesses.

• When the pricing process is done effectively, it helps in maximising revenue when the established price strikes a balance between profitability and the customer's demand.
• A good price helps the producer maintain competitiveness in the market without being at a loss.
• Pricing has a way of influencing the customer's attitude towards the product. It have the potential to drive sales and increasing customer loyalty.

What are some aspects that should be considered when setting the price of a product or service?

Assuming i was to get the best price for my perfume. it is absolutely necessary to take into consideration all the internal and the external factors that affects the price of my perfume oil. Here below are a few examples;

Internal Factors	External Factors
Cost	Market conditions
Profit margins	Customer willingness
Value proposition	Competitor pricing

Production Cost
When pricing, it is important to calculate what the total cost of production amounts to, including materials, labour, and overhead. This will make sure you don't run a loss.

Profit margins
Knowing the production and distribution cost will help determine what the desired profit margin should be just to ensure the business remains profitable.

Value proposition
Consider what the customers will gain, the unique benefits, and the value offered by the product or service.

Market conditions
Study and analyse the overall economic conditions, the market demand, and what you have as competition in the environment.

Customer willingness to pay
Research your target audience find out if they willing to pay for this service, and what is their perceived value of the product or service you are providing?

Competitor pricing
Identify who your competitors are and monitor their prices. This will help you keep your price competitive.

Establish examples of businesses that fit the pricing methods explained in the class, stating their reasons.

Cost-based pricing method
A simple small business starter like myself. I use a cost-based pricing method when assigning the price to the fragrances I produce. I only take into consideration the total cost of production, the lobour and delivery.

This type of pricing method is mostly used by manufacturers, service providers, and contractors. Once the main cost of production and a few important items that ensure profitability are accounted for, a price is established.

Demand-based method
Dynamic pricing is more interested in setting the price based on the demand for the product, lot of people in the retailers business practice demand-based pricing. If you call a driving service, the price will be dependent on how many people need that service at that time. The price for a room in a hotel will also go up when there is han event in the area and demand is high.

Method of determination justified in competition.

Retailers will fix a price because other retailers are selling it that way. The same is observed when looking at the price of food in a restaurant. It is based on what other restaurants put up as their price for the same food. The price of a luxury car at a dealership depends on how much that car is sold at other nearby dealerships.

The company Steemians makes an investment in equipment necessary for its production, which amounts to $130,000 to enable the production and subsequent sale of the new product. A return of 20% on the value of the investment is expected. The expected sales level for next year is 21000 units.

It is requested:

What should be the percentage of profit that should be added to a total unit cost of production of $ 25.00 to achieve the desired profitability?
At what price should it be released to the domestic market?
If the competition has a price of $ 28.00 for a product with similar characteristics, would it be possible to compete?

Available Variables

Total Investment	$130,000
Desired Return on Investment	20%
Expected Sales	21,000 units
Total Unit Cost	$25.00
Competitor's Price	$28.00

Calculating the desired profitability per unit

To calculate the desired profitability per unit, you need the following variables:

_{Desired Profitability per Unit = ?
Expected Sales = 21,000 units
Total Desired Return =}

We need to first of all calculate for total desired returns which is, total investment multiplied by desired return on Investment

20% X $130,000 = $26,000

With total desired returns being $26,000, we can now calculate Desired Profitability per Unit.

Desired Profitability per Unit = $1.24 per unit

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To achieve the desired profitability, you should add a percentage of profit to the total unit cost of production ($25.00).

_{Desired Profit per Unit is $1.24
Total Unit Cost is $25.00
Percentage Profit is ($1.24 ÷ $25.00) x 100% = 4.96%}

So, you should add approximately 4.96% to the total unit cost of production.

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for the selling price, calculate it by adding the desired profit to the total unit cost:

Selling Price = total unit cost + desired profit

25.00 + 1.24 = 26.24

Selling Price = $26.24

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Now considering the fact that the competition has a price of $28.00 for a similar product, keeping our price at $26.24 is competitive enough on the good side.