Product Pricing Strategies & Methods
1. Price and Key Variables
Price is the economic consideration a manufacturer receives for producing and distributing a product or service. Key variables influencing price include:
- Internal Variables: Costs, marketing mix, objectives.
- External Variables: Consumer class, competition, legal and political constraints, tariffs, product origin, international product lifecycle.
2. Cost Classification
Cost is the monetary value of goods purchased and used in production.
- Based on Production Changes:
- Fixed Costs: Do not change with production volume.
- Variable Costs: Change with production volume.
- Based on Product Relation:
- Direct Costs: Directly attributable to a product.
- Indirect Costs: Attributable to multiple products.
Pricing based on total product costs plus a margin is a simple method often used when foreign markets are unfamiliar.
3. Legal and Political Constraints
Export pricing must consider each country’s legal and political landscape. Anti-dumping laws exist in many industrialized nations, prohibiting selling below domestic prices or actual cost. Tariffs and import taxes increase the final product price, impacting competitiveness. Quotas, by limiting supply, can indirectly increase import prices.
4. Exchange Rates
Currency depreciation increases import prices, potentially forcing exporters to lower prices to compete. Conversely, currency appreciation may allow exporters to increase prices.
5. Country of Origin
Consumer perception of the product’s origin influences pricing. A negative perception coupled with a low price may signal low quality.
6. Product Life Cycle
The product’s life cycle stage in each market affects pricing flexibility. Greater flexibility exists during introduction with less competition. As the product matures, market prices become more influential.
7. Basic Pricing Methods & Target Pricing
Three basic pricing methods exist: cost-based, competition-based, and market-based (demand-based).
Target pricing determines the price needed to achieve a specific profit at a given volume. Break-even analysis, a component of target pricing, calculates the sales volume needed at a certain price to cover fixed and variable costs.
The break-even point is where total revenue equals total costs, resulting in zero profit. Above this point, profits are generated; below, losses are incurred.
Break-even analysis formulas:
Total Revenue (TR) = Total Cost (TC) = Price (P)
P x Quantity (Q) = Fixed Costs (FC) + (Variable Cost per Unit (VCU) x Q)
8. Competition-Based and Market-Based Pricing
- Competition-Based: Prices are set relative to competitors, with costs as the price floor. Larger firms often act as price leaders, while smaller firms follow.
- Market-Based (Demand-Based): These methods are subjective, considering consumer psychology. The perceived value sets the price ceiling.
9. Break-Even Analysis (Revisited)
The target price method aims to determine the price for obtaining a given profit at a specific volume. Break-even analysis helps calculate the required sales volume at a certain price to cover fixed and variable costs.
The break-even point is where total revenue equals total costs, resulting in zero profit. Above this point, profits are generated; below, losses are incurred.
Break-even analysis formulas:
Total Revenue (TR) = Total Cost (TC) = Price (P)
P x Quantity (Q) = Fixed Costs (FC) + (Variable Cost per Unit (VCU) x Q)