![]() ![]() The profit level you want for the business is expressed in a percentage. Mark-up pricing is favored by businesses with many products because it is simple to calculate. Include a profit percentage with product cost Marketers call this method mark-up pricing. These values are included in the product cost subtotal. ![]() The use of your land or capital equipment also must be valued along with depreciation on your machinery and buildings. You need to set a value for your management expertise and labor. The key to accuracy is to ensure all cash and non-cash costs (raw material, labor and overhead/operating costs) are included in the product cost subtotal. ![]() price is a blend of total profit and product cost (planned-profit pricing)Īll types of cost-based pricing will be more accurate if you use a complete product cost subtotal.add a percentage to an unknown product cost (costplus pricing).include a profit percentage with product cost (mark-up pricing).The amount of profit you add to the product cost subtotal can be set according to the following three different methods: Once you have a base cost, then add the profit level you want for the business to the product cost subtotal to determine your product price. To calculate product cost you need to include the costs of operating the business, which could include raw materials, transportation, advertising, wages, rent and other costs incurred in producing the product. You may want to blend several pricing methods to suit your business and the type of product(s) you sell.Įach of the three cost-based pricing methods described begin with a product cost subtotal. Before you select a pricing method, be sure you understand the range of options available and their disadvantages and advantages. price a bundle of products to reduce inventory or to excite customersĪs you review each pricing method, think about your business, industry and customer.design a price range to attract many consumer groups.If the product is unique or innovative, a value-based price may help create a demand for the product or service. add a percentage to an unknown product costĬompetition-based pricing is where the price covers costs (cost of raw materials and the cost of operating the business) and is comparable to the competitor’s price.Ĭustomer-based pricing, also known as value-based pricing, is a system where the price is based on the customer ‘demand’ or need for the product.include a profit percentage with product cost.There are three basic methods to price your product:Ĭost-based pricing is where the price includes the cost of ingredients and cost of operating the business. Use changes in the industry or the development stage of your product as an indicator that it’s time to review your pricing strategy. As you learn more about your customers and competition, you may decide to change your pricing method. The way you set prices in your business will change over time, for many reasons. ![]() The low initial price can create an expectation of permanently low prices amongst customers who switch.The pricing method you select provides direction on how to set your product price. Penetration pricing strategies do have some drawbacks, however: Sales volumes should be high, so distribution may be easier to obtain The low price can act as a barrier to entry to other potential competitors considering a similar strategy It forces the business to focus on minimising unit costs right from the start (productivity and efficiency are important) Encouraging word-of-mouth recommendation for the product because of the attractive pricing (making promotion more effective) Catching the competition off-guard / by surprise Penetration pricing is often used to support the launch of a new product, and works best when a product enters a market with relatively little product differentiation and where demand is price elastic – so a lower price than rival products is a competitive weapon.Īmongst the advantages claimed for penetration pricing include: However, there are some significant benefits to long-term profitability of having a higher market share, so the pricing strategy can often be justified. In the short term, penetration pricing is likely to result in lower profits than would be the case if price were set higher. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume. The strategy aims to encourage customers to switch to the new product because of the lower price. Penetration pricing is the pricing technique of setting a relatively low initial entry price, usually lower than the intended established price, to attract new customers. The aim of penetration pricing is usually to increase market share of a product, providing the opportunity to increase price once this objective has been achieved. You often see the tagline "special introductory offer" – the classic sign of penetration pricing. ![]()
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