Variables In The Price Of A Good: Identification And Examples

The variables in the price of a good are the various factors that a company must consider when setting a sales price for a product or service. Price is often one of the hardest things to determine in the business.

Regardless of whether you intend to offer the products at a low or high price, you must first understand the market and strategize according to demand and income level.

If people are asked to overpay for a service or product, they will stop buying it. If, on the contrary, the price is too low, then the profit margin is reduced or consumers will assume that the product is of low quality. 

An overall optimal price takes into account all costs and maximizes profit margins, while remaining attractive to consumers.

Learning how to create a competitive product pricing strategy is crucial, especially if the goal of the marketing plan is to increase market share and survive in a highly competitive environment.

What are the variables in the price of a good?

Competitors

They have a big impact on pricing decisions. The relative market shares, or market strength, of competitors influence whether a company can set prices independently or whether it has to follow the leadership shown by competitors.

Costs

A company cannot ignore the cost of production or the purchase of a product when it comes to setting the selling price.

In the long run, a business will fail if it sells for less than cost, or if its gross profit margin is too low to cover the company’s fixed costs.

State of the market for the product

If there is a high demand for the product, but there is a shortage of supply, then the company can raise prices.

State of the economy

Some products are more sensitive than others to changes in unemployment and workers’ wages. Manufacturers of luxury products will have to lower prices, especially when the economy is in recession.

Bargaining power of the client

Who are the buyers of the product? Do they have any negotiating power over the established price? An individual consumer has little bargaining power over a supermarket, although they can go shopping elsewhere.

However, an industrial customer purchasing substantial quantities of a product from a company can negotiate lower or special prices.

Other elements

It is important to understand that prices cannot be set without reference to other elements that make up marketing.

The distribution channels used will affect the price. Different prices may be charged for the same product sold, whether it is made directly to consumers or through intermediaries.

The price of a product in the decay stage of the product life cycle should be lower than when it was launched.

How are they identified?

Know the market

You must inquire how much your competitors charge, as well as how much your customers will pay. Then you can decide if you want to match or exceed them. This point is called the “break-even point.”

However, it is dangerous to simply match a price. You must be sure that all costs are covered, both indirect and direct.

Study the competition

It is always a good idea to know the competition so you can challenge them at their weakest point, and thus put yourself in a good position. This requires a SWOT analysis (Strengths, Weaknesses, Opportunities and Threats).

After identifying your weaknesses, you can go after customers who are not satisfied with the products and services offered by the competition and move on.

You can also target locations where competition is relatively weak so that you can gain market share quickly enough.

Calculate costs

All direct costs should be included, including money spent developing a service or product. Variable costs (packaging, materials, etc.) are then calculated. The more that is made or sold, the higher these costs will be.

Calculate what percentage of fixed costs, which are overheads like salaries and rent, the product needs to cover. All these costs are added up and divided by the volume to produce an average unit cost.

Additional price to cost

Pricing additional to cost involves adding a profit percentage to costs. This ensures that the company’s total costs plus a predetermined profit margin are fully recovered.

This is the classic price for lemonade stalls, and it’s common in the business-to-business manufacturing industry.

Price based on value

It is established by the amount of value that customers assign to a product. You will have to be well aware of the market to determine a price that is based on value.

For example, the cost of bringing a blender to market could be $ 11. However, customers could possibly be charged $ 26, if this is the existing market value.

Examples

Marked price

Most retailers use markup prices. They resell the items they purchased from a wholesaler, and then set a selling price to the end consumer consisting of the original wholesale price plus the retailer’s marked markup.

For example, a bookstore may sell books for 10% above the costs incurred by the store in purchasing its inventory.

This surcharge should cover costs unrelated to business inventory management (labor, insurance, rent, etc.) and provide an additional profit margin.

Price psychology

Setting the price of a watch at $ 199 has been shown to attract more consumers than setting it at $ 200, although the real difference here is quite small.

One explanation for this trend is that consumers tend to pay more attention to the first number on a price tag than the previous one.

The goal of price psychology is to increase demand by creating an illusion of higher value for the consumer.

Package prices

Package prices are most effective for companies that sell complementary products. For example, a restaurant can take advantage of the package price by including dessert with each dish that is sold on a particular day of the week.

Small businesses should keep in mind that the gains they make from the higher-value items should outweigh the losses they receive from the lower-value product.

References

  1. Marketing Donut (2019). Seven ways to price your product. Taken from: marketingdonut.co.uk.
  2. Jason Gillikin (2019). Product Pricing as a Marketing Strategy. Small Business – Chron. Taken from: smallbusiness.chron.com.
  3. Tutor2u (2019). Pricing – factors to consider when setting Price. Taken from: tutor2u.net.
  4. Smriti Chand (2019). Factors Affecting Pricing Product: Internal Factors and External Factors. Your Article Library. Taken from: yourarticlelibrary.com.
  5. April Maguire (2019). 6 Different Pricing Strategies: Which Is Right for Your Business? Intuit Quickbooks. Taken from: quickbooks.intuit.com.

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