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MARKETING STRATEGIES III
YOUR PRICE
Cost, Competition, Customer
Establishing prices involves three primary
considerations. These are as follows:
- Your cost
- Your competition
- Your customer
Minimum Price
In normal circumstances, cost can be considered a minimum
price. Certainly, when closing out a product line or reducing a
surplus in inventory,
you may temporarily sell below cost. But pricing below cost can
never be a
continuing formula for prosperity. Nor can selling at your cost
be expected
to make you prosperous.
Competitive Prices
If you cannot sell below cost, then how far above
cost can you sell? This will be influenced by your competition. Perhaps
your product
has certain advantages that justify a higher price. Perhaps you plan
to sell below
competition to capture the largest possible share of the markets.
But there is a delicate balance involved in selling below competition.
Will the
increased number of units sold result in enough additional profit
to
warrant cutting prices? And, will a lower price give your products
an unfavorable image?
Customer Reaction
How will your customers react to prices higher
than competition? Will they recognize the advantages of your product
and pay the premium?
Can
they be persuaded by salespeople that your product is worth
a little more?
On the other hand, your product may be no better than that offered
by competition. Nor can you point to any significant advantages
in the product support that you offer such as service, delivery,
or
credit
terms. How
large a discount will be necessary to attract customers away
from your
competition? How much will it cost to tell the market that
you sell for less?
Establishing a Price Floor
The first step in pricing is to determine
your product cost, the floor below which prices cannot fall.
All costs can be classified as variable or fixed (overhead). Variable costs
are the out-of-pocket costs or costs of doing business that
you incur with each unit of your product that you sell. They include
the
purchase price
of goods acquired for resale, sales commissions,
and any product preparation charges such as alterations
or delivery
costs.
Fixed costs are the costs of being in
business. These costs include such items as rent, administrative
salaries, equipment depreciation, and office expenses.
They go on from month
to month with little
variation due to sales.
Consider a product that sells for
$1.00.
You buy it for $0.50, pay a $0.06 commission
on every sale, and
incur delivery
costs of
$0.04
on every sale. Each time you sell one unit you realize
$1.00 in revenue and incur $0.60 ($0.50 + $0.06 + $0.04)
in out-of-pocket
costs.
Each $1.00 sale
provides
$0.60 to pay your variable costs. The balance of $0.40
($1.00 - $0.60)
contributes to covering your overhead and,
once your overhead is covered, producing a
profit.
Unit Contribution
The difference between
the selling price and the variable
cost can be called the unit contribution.
Unit
Selling Price
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