Successful pricing

Pricing for profit

 Pricing for profit

Most entrepreneurs struggle with figuring out how

to price their product or service.
Price too high and you can count your customers
on one hand. Price too low and you risk never
making a profit.
three simple rules :

Know your Market

If you operate in a market that is highly competitive,
chances are you have little ability to price above the
going rate for your product.
 Know your Customers
Why do customers want to buy your product? Are you
solving a problem that was never solved before, or are
you making incremental improvements to a product
category that already exists?
 Know your Cost Structure
The last critical piece to solving the pricing puzzle is
understanding how much it costs to provide the
product or service. Sounds simple, but often
entrepreneurs underestimate actual product costs by
excluding relevant costs .
 PRICING OBEJECTIVES
1. To aim for flexibility sufficient to meet the changing economic
condition of various target market
2. To discourage competition from entering the industry
3. To stimulate profitable combination sales for the entire product line
4. To maintain market share
5. To maintain a specified rate of profitability or return of investment
 ASSUMPTIONS BEHIND
COST-VOLUME-PROFIT RELATIONSHIP
1. Cost can be pinpointed as being variable cost
2. The behavior of costs and revenues has been determined to be
reliable, and established as being linear over the relevant range.
3. Selling prices will be constant
4. Efficiency and productivity will be constant
5. Changes in the level of beginning and ending inventories are
insignificant in amount
APPLICATION OF THE
CONTRIBUTION
MARGIN TECHNIQUE
 cost that does not change with an
increase or decrease in the amount of
goods or services produced or sold.

expenses that have to be paid by a

company, independent of any business
activity.
 cost that varies with the level of
output.

corporate expense that varies

with production output.
 Mark-up
A markup is added onto the total cost
incurred by the producer of a good or
service in order to cover the costs of doing
business and create a profit. The total cost
reflects the total amount of both fixed and
variable expenses to produce and
distribute a product.
 allows a company to
determine the profitability of
individual products.
can also refer to a per unit
measure of a product's gross
operating margin
product's price minus its total
variable costs.
 Company XYZ

Sales (per unit) $100

TOTAL VARIABLE COST

Direct Materials Expense $12
Variable labor expense $25
Variable overhead (per unit) $10

CONTRIBUTION MARGIN $53

Fixed overhead per unit $8

NET PROFIT $45

Revenue $1,000,000

Variable expenses 400,000

Contribution margin 600,000

Fixed expenses 660,000

Net loss ($60,000

CONTRIBUTION MARGIN
 Used by management
when making pricing
decisions.
Helpful to analyze the
impact of different
levels of sales.
Resolve bottlenecks.
When your competitor reduces his price for a
product:

STAY at your current price

MATCH the competitors price

LOWER your price than your competitor

 STAYING AT YOUR CURENT PRICE
(COMPETITOR REDUCES HIS PRICE FOR A PRODUCT)

MAY RESULT
A LOWER
MARKET SHARE
FOR YOU
 MATCHING THE COMPETITOR'S NEW PRICE

RETAIN
MARKET SHARE
 REDUCE PRICES

EXPAND THE
TOTAL MARKET
AND BENEFIT
ALL COMPETING
FIRMS
 COST VOLUME PROFIT ANALYSIS

Helps the firm in deciding rationally on which

products to retain or to drop
Enables the firm to cope with increasing variable costs
Enables management to evluate different alternatives
Enables the firm to determine the most profitable
combination of products to push
Cost-volume-profit (CVP) analysis is used to
determine how changes in costs and volume
affect a company's operating income and net
income.
 RICING STRATEGY
Skimming Pricing
A company initially sets a high price for
the product and at the same time
promotes it heavily via advertising and
sales promotion. Eventually the firm
lowers the price to capture a larger
share of market.
Penetration Pricing
The company prices its
products low in order to
penetrate its target
market as quickly as
possible, and thereby
gain market dominance.