Danbryan E. Go BEN 2209 1:30 p.m – 3:00 p.

m M,W
BS ENTP 2
BASIC PRICING STRATEGIES AND THE USE OF BREAKEVEN ANALYSIS

1. Considering costs in setting initial prices;

Pricing is often one of the most difficult things to get right in business. There are several
factors a business needs to consider in setting a price:

 Competitors – a huge impact on pricing decisions. The relative market shares (or market
strength) of competitors influences whether a business can set prices independently, or
whether it has to follow the lead shown by competitors
 Costs – a business cannot ignore the cost of production or buying a product when it
comes to setting a selling price. In the long-term, a business will fail if it sells for less
than cost, or if its gross profit margin is too low to cover the fixed costs of the business.
 The state of the market for the product – if there is a high demand for the product, but
a shortage of supply, then the business can put prices up.
 The state of the economy – some products are more sensitive to changes in
unemployment and workers wages than others. Makers of luxury products will need to
drop prices especially when the economy is in a downturn.
 The bargaining power of customers in the target market – who are the buyers of the
product? Do they have any bargaining power over the price set? An individual consumer
has little bargaining power over a supermarket (though they can take their custom
elsewhere). However, an industrial customer that buys substantial quantities of a product
from a business may be able to negotiate lower or special prices.
 Other elements of the marketing mix – it is important to understand that prices cannot
be set without reference to other parts of the marketing mix. The distribution channels
used will affect price – different prices might be charged for the same product sold direct
to consumers or via intermediaries. The price of a product in the decline stage of its
product life-cycle will need to be lower than when it was first launched.

Another way of considering costs in setting initial prices are:

1. Calculate your costs

 Before you calculate your price, it's useful to calculate how much it costs to produce or
deliver your product or service. When coming to a figure, always consider the cost of
producing your product or service as well as your overheads. Don't forget to also factor
in goods and services tax (GST) and other relevant taxes in your costing.
When you’re pricing your products or services you need to remember to include:
 manufacturing cost
 market place
 competition
 market condition
 brand
 quality of product
Once you know the true cost of your product or service you can then start analysing other
influences and set your objectives and strategies.

2. Determine your pricing objectives

A key consideration when you develop your pricing strategy is to understand your
objectives when you price your products or services. One objective of pricing is to make
a profit on your products or services, but there are many other pricing objectives that can
affect your pricing decisions including:
 position in the market
 competitors’ positioning
 ability to supply to or increase demand
Positioning
Positioning can help you establish your products or services in the market. For example,
your business might sell high-end products, try to compete on price, or get into the
budget level market. Price can indicate a level of quality so it's important that the price of
your products or services complement your overall brand.
Remaining competitive
For many businesses, being price-competitive is important, whether as a price leader or
responding to the competition. When setting prices it's always important to anticipate
what your competition will do in response to your prices and ensure that you factor it into
your strategy.
Increasing demand
Using price to increase demand in new or existing products or services can be a good
objective for establishing customers or boosting lagging sales. When multiple products or
services are involved, it's a good idea to be aware of how the prices complement each
other.
 It's important to keep your business and marketing objectives in mind when developing
your pricing objectives to ensure they’re complementary to one another. By establishing
your pricing objectives early, your choice of strategy may be easier to determine.

3. Determine your pricing strategy

There are a number of pricing strategies you can employ when setting your price,
including strategies based on:
 costs
 competition
 perceived value
 product
When choosing your pricing strategy, it's also important to keep your overall marketing
strategy in mind to ensure your strategies complement one another.
Cost-based pricing strategies
 Cost-plus pricing: a strategy that adds a small margin or mark-up to the costs of
producing and distributing the product or service. Care should be taken when calculating
your price to ensure that all relevant costs such as cost of goods sold, fixed costs
including Goods and Services Tax (GST) and other taxes are factored in. If your
calculations are accurate this strategy can keep your price competitive while ensuring that
you still make a profit.
 Charge per hour: this strategy is often used by service-based businesses and
independent contractors. The 'per hour' method calculates all the relevant costs of a
business at an hourly rate. When using this method it's important to factor in all your
business costs and not overlook taxes, a wage for yourself, superannuation and leave
entitlements.
Competition-based pricing strategies
 Going rate pricing: this strategy is a safe way for small businesses to remain competitive
without eating into profits. The strategy means you price your products and services close
to the market price leader.
Value-based pricing strategies
There’s a number of value-based pricing strategies you can use including:
 Value pricing: this strategy is based on what customers think a product or service is
worth, rather than actual costs. The value is determined through market testing and a
price is set based on this value. For example, sometimes customers will pay more if it
saves them a lot of time. The price reflects this saving.
 Premium pricing: this strategy reflects the prestige, luxury or exclusive value of the
products or services you provide. Typically, at a premium price customers have high
expectations of quality, performance and service.
 Product-based pricing strategies
There’s a number of product-based pricing strategies you can use including:
 Penetration pricing: this strategy provides you the opportunity to set a low initial price
on a new product or service to gain high sales or market share. Once this point is reached,
the prices are increased to normal pricing levels.
 Skimming pricing: this strategy sets a high initial price which aims to excite audiences
who desire products or services that are in high demand and are highly valued. Once the
required profits are made, the price is then lowered for a wider market.
 Loss leader pricing: this strategy aims to attract customers by offering a product or
service at below cost. The strategy hopes that customers will also purchase other products
or services with a higher profit margin.

4. Legislation and regulations

When you price your products or services, or even advertise a price, you need to comply
with regulations.
 Comparative pricing: when you compare the current price of a product to a previous
price, you must make sure you don’t mislead consumers. If you’re untruthful in any way,
you will be in breach of the Australian Consumer Law.
 Recommended Retail Price (RRP): this price is only a recommendation to a retailer.
It’s illegal for a supplier to pressure resellers into selling products at or above certain
prices, or threaten to cut off suppliers if price demands are not met.
 Predatory pricing: this pricing occurs when a business with significant market share
reduces their prices for the purposes of eliminating or damaging smaller competitors.
Predatory pricing is anti-competitive. Reports can be made to the Australian
Competition & Consumer Commission (ACCC).
 Price fixing: this practice is illegal in Australia. Price fixing is where 2 or more
competitors agree on setting prices or agree to charge certain fees.
 Parallel pricing: this practice follows the pricing practices of other businesses, mainly
competitors. This is illegal when it’s a ‘concerted practice’ between businesses and it
substantially reduces competition.
 Multiple pricing: this is typically done in error, when a good is advertised with more
than one displayed price. Under consumer law, a business must either sell the goods at
the lower price, or withdraw the good from sale until the price is corrected. This does not
apply when
o advertisements state that prices vary in different regions
o a price is hidden by another price
o a price is displayed in an overseas currency or unit price
 Unit pricing code: this regulation ensures that retailers calculate a standard measurement
unit price such as litres or grams. Unit pricing allows customers to compare the price and
value of similar types of products. Under the unit pricing code, it is compulsory for
certain retailers to display both a product price and a unit price for grocery items.
 Credit card surcharging: you must clearly label any credit card surcharges that apply to
your products or services. You can only charge what it costs you to accept that payment
method.
You can find out more about the rules around pricing on the ACCC's setting prices
page and in their Advertising and selling guide. 
Display your prices
You need to understand the legislation and regulation to ensure you display your prices
correctly. Your prices need to be clear, accurate and not misleading to consumers. Learn
more about displaying prices to comply with the Australian Consumer Law.
5. Research

Research can help you find the optimum price for your products. Generally, the optimum
price is one that your customers are willing to pay, without it affecting your profits. This
isn't a one-off activity, you must monitor your key pricing influences regularly as part of
your overall market research to ensure your prices stay competitive and you still meet
your customers' expectations.
Market testing
To help you determine how much your customers are willing to pay for your product or
service you should perform some form of market testing. As a start, research your
customer's purchasing behaviour such as:
 their current and anticipated demand for this type of product or service
 what they pay for similar products or services
 the quantity likely to be purchased
 additional features they value
With this customer information in mind, you can then develop a price comparison
offering a number of different product or service options for testing to help you determine
a price range that is acceptable.
Competitors
You should have already determined who your direct competitors are and how your
business compares to them when you developed your marketing plan. This information
can be useful to help you determine your price point.
If you decide to use your competitors' prices as a guide, be careful that it doesn't dictate
your prices too much, as it can seriously undervalue your product or service and drive
down your profits.
 When you compare your business to competitors, it's also important to ensure you look at
the business as a whole and compare on other value-based traits (such as special features,
quality and customer service) as well as price. 
Influences
Pricing influences are external factors that can impact the price of products. Four
influences that you may encounter include:
 price sensitivity
 level of demand
 level of competition
 government regulation
Price sensitivity
Price sensitivity refers to price fluctuations as customer demand increases and decreases.
For example, commodity goods such as petrol have high price sensitivity. The difference
of a few cents in price can impact a customer’s behaviour.
Some markets are more sensitive to price increases than others. Price sensitivity can
change over time based on a number of factors including changes in the economic
environment, competition or demand. Factors other than price, such as quality, service,
and uniqueness, can also influence price sensitivity.
Level of demand
Product and service demand can influence your prices. If there is high demand, it is likely
you can increase your price. Price can also influence demand. For example, if the price
lowers, then demand can temporarily increase.
Level of competition
Competition can also influence your product’s or service’s price. In general, the less
competition you have, the more demand there is for your product. If a new competitor
enters the market, the competitor can affect your price.
Government regulations
Government regulation can influence your pricing decision, as additional fees or levies
may increase the sale price of your product or service.
Discounts

Discounts can affect your bottom line. While you may quickly sell and remove stock
from your supply, you also need to understand how discounts affect the rest of your
business.
Your business can benefit from offering a discount. These benefits can include that you:
 attract new customers
 sell unwanted stock
 entice customers to return
There are different types of discounts. These include:
 special offers or pricing deals
 packages or bundles
 quantity discounts
 value-add offers
 seasonal or periodic discounts
If you intend to offer discounts, you should develop a plan specifically for that sale.

2. Bounds of the typical price;

It is also sometimes called a pricing corridor, having a minimum and a maximim price for
a product. What it really means is that the company does not know their customers
wiliness to pay and give free range, within that pricing corridor, for sales people to
negotiate any price they want. To have a lower or floor price make sense, but having a
upper limit does not.

The right way to price is always to align prices with customers willingness to pay.

A sample model from a research company called Atenga uses the following factors:

1. Research: In order to price right, companies has to do research into their marketplace.
The research need to anonymous and it has to reach statistical significance.

2. Willingness to pay: Using advanced research technologies, it is possible to accurately

measure what a marketplace is willing to pay for just your product or services and
specifically for the unique benefits your products or service provide to customers.

3. Drivers: A driver is something about your product or service that influence your
customers' willingness to buy and to pay. Decision drivers increase willingess to buy,
value drivers increase willingness to pay. Drivers are not limited to product/service
features/functions/benefits but they are also how you position the company, how you go
to market, your marketing messages and how customer perceive your company and
product/service compared to competition and alternatives.

4. Segmentation: Deep and detailed segmentation based on socioeconomics, value

drivers, decision drivers and willingness to pay generates a treasure trove of hard data
about your market.
 5. Tying it all together: From this process you get:

- What market segment has the highest willingness to buy and to pay. What product
features/benefits and marking messages resonate specifically well with this segment and
where, and how, do they want to learn about your product or service.

- What specific price level will generate the highest market share, what specific price
level will generate the highest revenue and profits.

- What specific pricing structure generates the highest market share and revenue.

- What marketing messages and positioning statement is most effective in driving

conversion.

- How much will your pricing of one product/services cannibalize sales of competing
product/services. How can you set your pricing to minimize cannibalization of your other
products/service.

- In short, you get a recipe for how to price "right", how to market "right" and how to sell
"right".

3. Basic strategies for setting and initial price.

5 common pricing strategies
Pricing a product is one of the most important aspects of your marketing strategy. Generally,
pricing strategies include the following five strategies.
1. Cost-plus pricing—simply calculating your costs and adding a mark-up

2. Competitive pricing—setting a price based on what the competition charges

3. Value-based pricing—setting a price based on how much the customer believes what
you’re selling is worth
4. Price skimming—setting a high price and lowering it as the market evolves
5. Penetration pricing—setting a low price to enter a competitive market and raising it later
Sources:
https://www.tutor2u.net/business/reference/pricing-factors-to-consider-when-setting-price
https://www.quora.com/What-do-upper-and-lower-bound-prices-mean-in-product-pricing
https://www.bdc.ca/en/articles-tools/marketing-sales-export/marketing/pages/pricing-5-common-
strategies.aspx