Small Business Pricing

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1.4 What is Pricing?

Let’s begin with the definition of Pricing.

Pricing is the method followed by a business to determine the selling price for its products or services.

Price is one of the four Ps of marketing. The other three are product, promotion, and placement. These are all costs incurred by a business during operation. Note that pricing is influenced by the cost of production, promotion, and placement of the product being sold.
Other pricing factors include competition, market conditions, brand, and quality of product. The price of a product, and of services like tuition, insurance premium, interest, rent, fare, toll,
and salary, are some examples of price.

1.5 Steps for Pricing a Product

Now, let’s learn about pricing in detail. Pricing a product usually involves:
•     Developing a marketing strategy,
•     Creating the "marketing mix," a technique used to develop plans for marketing a product,
•     Studying and estimating the demand for a product,
•     Calculating the fixed and variable costs related to a product,
•     Generating a price based on the market needs by predicting competitor strategies and understanding legal constraints, and
•     Setting the price of the product using the information collected through the previous steps.

1.6 Pricing vs. Costing

Do you know how pricing differs from costing? Let’s first learn about cost to find out.

To determine the price for a product or service, business owners should understand the costs of running their business.

If prices do not exceed costs in the long run, the business will fail.

Costs include:

•     Property and equipment leases,
•     Loan repayments,
•     Inventory,
•     Utilities,
•     Financing costs, such as interest on loans,
•     Salaries/wages/commissions,
•     Markdowns,
•     Shortages, such as not having an item in stock,
•     Damaged product,
•     Employee discounts, and
•     Desired profit.

Profit should be included on the list of costs and treated as a fixed cost. Nobody runs a business just to break even.

1.7 Pricing as a Component of the Marketing Mix

Now that you know about the first Ps of marketing, here’s an overview of the four Ps of marketing.

The “Marketing Mix” is composed of the four Ps of marketing:

•     Product
•     Price
•     Place
•     Promotion

As a product is developed, a business needs to create a marketing strategy by identifying the target market and product placement. Ideally, the price of a product should match its quality.

Pricing is determined by these tradeoffs among the elements of the marketing mix.

1.8 Pricing Objectives

Do you know why it’s important to conduct a pricing exercise?

A part of a pricing strategy depends on the objectives of the organization. Some common pricing objectives are:

•     Increasing sales: Here, the objective is to sell the maximum number of product units or serve the maximum number of customers to decrease long-term costs and increase market share.

•     Increasing profit: Here, the objective is to increase current profit by increasing revenue and decreasing costs.
•     Increasing revenue: Here, the objective is to increase current revenue irrespective of profit margins. Here, the company is trying to maximize long-term profits by increasing the market share and reducing costs.
•     Considering competitors’ price: Price of a product should be fixed considering the competitors’ prices.
•     Maintaining quality leadership: The objective is to use price to create a perception that the product is a quality leader.
•     Recovering partial cost: Sometimes a business may use other revenue sources to subsidize the price of a product or service. It may do this to increase market share, especially when selling a complementary product or while improving the business’s public image.
•     Surviving unmanageable situations: There could be situations, such as an economic recession, in which the organization’s sole objective would be to cover costs to remain in the market. Until the situation improves, profits may be ignored.
•     Maintaining stability: Here, the objective is to avoid price wars and achieve price stabilization to maintain profit at a steady level.

1.9 Sales Promotion

Pricing strategies can also be used as sales promotion tactics. Some common ideas are:

•     Skim Pricing,
•     Penetration Pricing,
•     Leader Pricing,
•     Premium Pricing,
•     Differentiated Pricing,
•     Psychological Pricing, and
•     Discounts and Sales.

You will learn about these pricing strategies in the next few pages.