{"id":18897,"date":"2019-05-14T14:14:17","date_gmt":"2019-05-14T11:14:17","guid":{"rendered":"https:\/\/www.ibtdi.com\/?p=18897"},"modified":"2019-05-14T00:39:03","modified_gmt":"2019-05-13T21:39:03","slug":"the-right-mechanism-for-pricing-your-product","status":"publish","type":"post","link":"https:\/\/www.ibtdi.com\/en\/the-right-mechanism-for-pricing-your-product\/","title":{"rendered":"The right way to price your product"},"content":{"rendered":"

\n

\"Cute<\/p>\n

I was reminded of a heated discussion between the general manager of a company and its marketing director about the right way to price the company\u2019s products. The former argued that <\/span><\/p>\n

pricing should be based on the products\u2019 perceived value and market demand, without being tied to a specific profit margin, while the latter believed that Pricing<\/a> it should be based on <\/span><\/p>\n

a realistic formula that produces more accurate figures, making it possible to calculate each product\u2019s total costs, allocate percentages to certain expenses\u2014such as maintenance and marketing\u2014and then <\/span><\/p>\n

Add the desired profit margin to arrive at the product\u2019s actual price, keeping the margin secure without overpricing.<\/span><\/p>\n

.<\/p>\n

\u00a0<\/span><\/p>\n

\u0627\u0644\u0637\u0631\u064a\u0642\u0629 \u0627\u0644\u0645\u062b\u0644\u0649<\/span><\/h2>\n

In my view, both positions are sound in principle, but the success of either depends on how it is implemented and the steps involved. Before I go into more detail about this case, <\/span><\/p>\n

Several questions should be considered before setting a pricing strategy: What is the company\u2019s overall strategy? What are its goals? What are the characteristics of its products? And what is the company\u2019s strategy for those products? <\/span><\/p>\n

In terms of development and quality improvement? What competing products are on the market? What is the company\u2019s own product\u2019s market share and position? Who is the target audience? And how<\/span><\/p>\n

receptive are customers to the prices?<\/span><\/p>\n

This approach should not be considered a general model to follow Pricing<\/a> in every case. Pricing strategies vary and are shaped by many questions. This example was intended <\/span><\/p>\n

to explain the importance of\u2014and the process for\u2014evaluating the pricing strategy being used.<\/span><\/p>\n

.<\/p>\n

The product\u2019s actual cost<\/span><\/h2>\n

After the general manager answered these questions, I felt the most effective approach was to arrive at the closest possible estimate of the product\u2019s actual cost; <\/span><\/p>\n

Then we add the required profit margin to arrive at an estimated price, which we use as the basis for our pricing strategy, as shown in this table:<\/span><\/p>\n

\u00a0<\/b><\/span><\/p>\n

\n\n\n\n\n\n\n\n\n\n<\/colgroup>\n\n\n\n\n
\n

Product<\/span><\/p>\n<\/td>\n

\n

Total fixed costs<\/span><\/p>\n<\/td>\n

\n

Total variable costs<\/span><\/p>\n<\/td>\n

\n

Maintenance allocation<\/span><\/p>\n<\/td>\n

\n

Marketing allocation<\/span><\/p>\n<\/td>\n

\n

\u0647\u0627\u0645\u0634 \u0627\u0644\u0631\u0628\u062d<\/span><\/p>\n<\/td>\n

\n

Price before tax<\/span><\/p>\n<\/td>\n

\n

Price including tax<\/span><\/p>\n

(Suggested retail price)<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

0%<\/span><\/p>\n<\/td>\n

\n

0%<\/span><\/p>\n<\/td>\n

\n

0%<\/span><\/p>\n<\/td>\n<\/tr>\n

\n

AB<\/span><\/p>\n<\/td>\n

\n

0<\/span><\/p>\n<\/td>\n

\n

0<\/span><\/p>\n<\/td>\n

\n

0<\/span><\/p>\n<\/td>\n

\n

0<\/span><\/p>\n<\/td>\n

\n

0<\/span><\/p>\n<\/td>\n

\n

0<\/span><\/p>\n<\/td>\n

\n

0<\/span><\/p>\n<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n<\/div>\n

\u00a0<\/b><\/span><\/p>\n

But the process doesn\u2019t end there:<\/span><\/p>\n

\u2014After entering the data in the table, we arrive at a price that helps safeguard the target profit margin to some extent. However, it would be a serious mistake to adopt <\/span><\/p>\n

the price immediately. First, we need to ask:<\/span><\/p>\n

\u2014Is the suggested price appropriate for the market? If not, we need to review the table we prepared.<\/span><\/p>\n

Can the cost of raw materials, for example, be reduced? Can some costs be eliminated or lowered without affecting product quality? Or is the profit margin <\/span><\/p>\n

or the percentage allocated to marketing too high?<\/span><\/p>\n

The next step before launching the product at the proposed price is to conduct an in-depth market study and reassess the profit margin based on its findings. Without <\/span><\/p>\n

carefully assessing the profit margin before offering the product or service at the proposed price, you leave your product facing two possible outcomes:<\/span><\/p>\n

.<\/p>\n

First: Losing more profit margin than intended:<\/span><\/h2>\n

For example, suppose the product\u2019s total cost, including all costs and allocated percentages, is 10 riyals. If you apply the profit margin you set\u2014say, 25%\u2014and sell <\/span><\/p>\n

the service for 15 riyals, might the market be willing to pay, say, 30 riyals for it? In that case, you would miss out on achievable profit margin, and here <\/span><\/p>\n

We can maximize the profit margin, in the general manager\u2019s view, because the market is willing to accept the product\u2019s price.<\/span><\/p>\n

.<\/p>\n

Second: Failing to achieve the sales target:<\/span><\/h2>\n

For example, suppose the product costs 10 riyals, including all costs and allocated percentages, and we apply the target profit margin\u2014say, 25%. <\/span><\/p>\n

If the service is then sold for 15 riyals, isn\u2019t it possible that the market will not accept that price and that the maximum acceptable price is, for example, 11 riyals? As a result, <\/span><\/p>\n

we would fail to achieve our target sales volume and fall far behind the competition.<\/span><\/p>\n

.<\/p>\n

\u0633\u064a\u0627\u0633\u0627\u062a \u0627\u0644\u062a\u0633\u0639\u064a\u0631<\/span><\/h2>\n

This example illustrates why it is important to move away from rudimentary pricing based solely on experience, and to assess your product\u2019s position in the market and research the market and customers <\/span><\/p>\n

during the pricing process. It is also important to choose a pricing strategy that supports your company\u2019s strategic goals, because policies <\/span><\/p>\n

There are several pricing strategies, including:<\/span><\/p>\n

\n

\u062a\u0633\u0639\u064a\u0631 \u0627\u0644\u062a\u0643\u0644\u0641\u0629:<\/span><\/h2>\n

This strategy calculates the total cost (administrative expenses, raw material costs, maintenance costs, and so on), then adds the target profit margin to arrive at the <\/span><\/p>\n

product\u2019s price for consumers. It\u2019s important to research the market before launching the product at the selected price.<\/span><\/p>\n

.<\/p>\n

\u062a\u0633\u0639\u064a\u0631 \u0627\u0644\u0642\u064a\u0645\u0629:<\/span><\/h2>\n

This strategy estimates your product\u2019s value in the market. The benchmark isn\u2019t simply your own experience; instead, it involves taking several steps and conducting research to determine your product\u2019s true value, <\/span><\/p>\n

It starts by studying the closest competing product and assessing your product\u2019s features and added value to the market. Next, you assign an appropriate monetary value to those features, while taking into account <\/span><\/p>\n

the product\u2019s financial drawbacks and subtracting their estimated cost from the projected price, to arrive at a potential price that must be higher than the product\u2019s costs. These steps also conclude <\/span><\/p>\n

by studying the market again, assessing customer demand, and determining whether customers are willing to pay the proposed price.<\/span><\/p>\n

.<\/p>\n

\u0643\u0634\u0637 \u0627\u0644\u0633\u0639\u0631:<\/span><\/h2>\n

This strategy is used when entering a new market with little competition. It involves setting a high price for the product to achieve the highest possible profit margin for a period of time, <\/span><\/p>\n

This period ends when new competitors enter the market with competitive prices. At that point, the company must adopt a new pricing strategy suited to the next stage.<\/span><\/p>\n

You may have noticed the huge difference between mobile call prices 16 years ago and today. Back then, only one or two companies in a given country offered the service, at a cost that was <\/span><\/p>\n

high\u2014until new competitors entered the market with competitive prices.<\/span><\/p>\n

.<\/p>\n

Market penetration pricing:<\/span><\/h2>\n

This strategy is used by companies new to the market, or to break into the market with a new product. It involves setting a low price, sometimes with a zero profit margin; <\/span><\/p>\n

The aim is to penetrate the market and establish footholds from which to reach customers. Once the desired<\/span><\/p>\n

results have been achieved, the company quickly shifts to a different pricing strategy.<\/span><\/p>\n

.<\/p>\n

Pricing Strategies<\/span><\/h2>\n

There are many pricing strategies, and they should be closely aligned with the company\u2019s strategies and objectives. They also evolve as the company\u2019s objectives and strategies <\/span><\/p>\n

develop. If the company\u2019s strategy is to penetrate the market, it should adopt a pricing strategy that supports this goal. When the company begins <\/span><\/p>\n

moving into a phase with different objectives\u2014such as increasing its market share, competing on price, or leading the market\u2014it should review its pricing strategy to ensure it aligns <\/span><\/p>\n

with its new objectives.<\/span><\/p>\n

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