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Pricing a Product

Simple Alliance, Kenya Limited


Rationale

Your product pricing methods are clarified in your pricing section. Within the pricing segment of your Business Description section, you make two set of important explanations and clarifications, namely:

  • The price you intend to charge on your services or products
  • Your justification for the price

Selling Price    

Primary Determinants 

Your selected price derives from primary factors such as:

  • Cost of production
  • Projected profit margins
Production Cost

You consider various production parameters when pricing a product. Expense items such as labour, utilities, cost of materials, transportation, distribution, marketing, and advertising costs constitute your cost of production.  You need to accurately calculate these expenses so as to come with a realistic total figure. You then factor in this sum as you compute your service and product selling prices.   

Forecasted Profit Levels

After calculating your total cost of production, you add your projected profit sum onto the production cost figure. The resulting value is the sum total of your product costs and projected profits.  

Indirect Determinants of Price

Your selected selling price is also dependent on certain  indirect factors. Some of these aspects include:

  • Convenience
  • Target market segment
Convenience

If your business premises are located at a downtown venue, your prices are likely to be high. Similar businesses which are located far away from the town centre will usually charge lower prices.  The price differentials are due to differing convenience at the two business premises. With the downtown business, customers will simply walk from their offices so as to purchase wares. In this case, customers enjoy more convenience as they may not even have to travel by vehicle to the business premises.  These customers are content with paying more for the provided services and products. On the other hand, customers who frequent the farther away business establishment enjoy less convenience. Customers may have to ride on cars to reach the business premise. Further, the facility may be overcrowded due to the low prices. These inconveniences justify the low price here.

Target Market

A business that deals in luxury wares usually charges high prices for the merchandise. For example, if your business specialises in rare art relics, you can justifiably charge high prices. Conversely, if your business sells basic or essential services or products such as flour, you are not justified in charging exorbitant prices.             

Caution

Take care that you do not fall into common traps when pricing your ware.  Some usual snares include: 

  • Under-pricing your merchandise to the point of scaring away potential financiers or investors
  • Under-pricing your wares, thus being unable to appropriately raise prices based on future cost increases
  • Overpricing common, low-quality wares, thus making low sales

Your pricing exercises are guided by the cost of production as well as expected profits. These are the primary elements you look at when pricing a product. They reflect on your pricing methods. Indirect, secondary price determinants include aspects such as convince and your target market. You would highly price conveniently located wares. Services and products located in far-flung areas are likely to fetch low prices. Moreover, the financial strength of your target market as well as the use of your merchandise is a determinant of your selling price.  Luxury goods usually fetch high prices. You need to always justify the price your charge for your services and products. Such issues influence your product pricing methods.

Copyright (C) 2016, Simple Alliance Kenya Limited

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