Costing and pricing methods reviewed
Cost-orientated pricing
Many small businesses determine their basic price based on their costs. The idea is to set your price high enough to cover your costs and still make a profit (Van der Walt et al., 1995).
Cost-plus pricing
Many small businesses use this method. Here you determine the cost of the product and then add a set percentage to the cost for the profit margin. This method is popular and easy to use.
Assume you are the manufacturer of steel fences. You financial analysis showed the following:
Variable costs R60
Fixed costs R15 000
Expected sales 5000 fences
The unit cost for each fence is:
Unit cost = Variable cost + Fixed cost Current …show more content…
When BMW increased their car prices over a two-year period, competitors expected them to have fewer sales. But this did not happen. The company's manager explains, "This pricing strategy helped a lot. The BMW 3 Series, a medium-priced local car has been competing against higher priced imported cars. To stop sales from dropping, BMW raised its prices to achieve a more up market image."
An increasing number of medium-priced products are struggling against competing products in the luxury and discount price ranges. Customers are choosing either higher-priced or lower priced products. Up market ice creams like Aylesbury are doing well, and so are supermarkets' no-name brands, but medium priced products like Dairy Maid are fighting to hold their market share.
These days, choosing the right price is even more important than it was in the past. Although much has been written about pricing products, the fact is that pricing is very difficult. Production costs influence a product's price, but many other less obvious factors also influence pricing. Lower prices are preferred for most products, but there are exceptions like Mercedes Benz where the higher the price, the more customers want the
Cost-orientated pricing
Many small businesses determine their basic price based on their costs. The idea is to set your price high enough to cover your costs and still make a profit (Van der Walt et al., 1995).
Cost-plus pricing
Many small businesses use this method. Here you determine the cost of the product and then add a set percentage to the cost for the profit margin. This method is popular and easy to use.
Assume you are the manufacturer of steel fences. You financial analysis showed the following:
Variable costs R60
Fixed costs R15 000
Expected sales 5000 fences
The unit cost for each fence is:
Unit cost = Variable cost + Fixed cost Current …show more content…
When BMW increased their car prices over a two-year period, competitors expected them to have fewer sales. But this did not happen. The company's manager explains, "This pricing strategy helped a lot. The BMW 3 Series, a medium-priced local car has been competing against higher priced imported cars. To stop sales from dropping, BMW raised its prices to achieve a more up market image."
An increasing number of medium-priced products are struggling against competing products in the luxury and discount price ranges. Customers are choosing either higher-priced or lower priced products. Up market ice creams like Aylesbury are doing well, and so are supermarkets' no-name brands, but medium priced products like Dairy Maid are fighting to hold their market share.
These days, choosing the right price is even more important than it was in the past. Although much has been written about pricing products, the fact is that pricing is very difficult. Production costs influence a product's price, but many other less obvious factors also influence pricing. Lower prices are preferred for most products, but there are exceptions like Mercedes Benz where the higher the price, the more customers want the