The exegesis of price determination by the business inclined people is usually a problematic one which affects the profits and the consumer-seller relationship. This is because price is a very important driver and determinant in every capital market. It is the will-force that boosts the confidence of the buyer and the seller for profit actualization and creates a room for more production and more consumption. For every businessman, woman or production owner, the major interest and motive is profit maximization. In order to achieve this, there must be a technical way of setting out standard in maintaining the prices of goods both in wholesale and retail level for the consumer to be satisfied and equally, for the harnessing of the profits by the goods owner. However, there are always discrepancies between the buyer and the seller as regard to the constant change in price. This is as a result of so many factors in the side of production that constantly affects the prices of the production, which the owner of the production is running away from unnecessary deficit. In this piece of work, we will explain vividly how wholesale prices can be determined, the factors militating against it should be curbed, and the easy way of setting up a standard price determinant in the cost of products both in retail and wholesale price level. The remuneration of every production which envisages in a wholesale price is being determined by the retail price which is divided by half (preferably not less than 25%) to enable the achievement of the pricing plans in accordance with the consumer demands.
The pricing methods
The pricing method you select provides direction on how to set your product price. The way you set prices in your business will change over time, for many reasons. As you learn more and more about your customers and competition, there is every tendency to change your pricing method and formulas. You can equally use changes in the industry, commerce or the development stage of your product as an indicator that it’s time to review your pricing strategy. There are numerous methods or factors which can be used to price your product, but we are going to focus on the basic ones. These methods include:
Cost based pricing: the basic features of these pricing include a profit percentage with product cost. You add a percentage to an unknown product cost blend of total profit and product cost. Cost based pricing Each of the three cost based pricing methods described begin with a product cost subtotal. To calculate product cost you need to include the costs of production, promotion and distribution. Add the profit level you want from the business to the product cost subtotal to determine your product price. The amount of profit you add to the product cost subtotal can be set according to three different methods. All types of cost based pricing will be more accurate if you use a complete product cost subtotal. The key to accuracy is to ensure all cash and non-cash costs are included in the product cost subtotal. You need to set a value for your management expertise and labor. Using your land or capital equipment also must be valued along with depreciation on your machinery and buildings. These values are included in the product cost subtotal. In a nutshell, this method requires that; after calculating the actual cost of your product or service you add the desired amount of profit to reach the selling price. Secondly,
Competition based pricing price: This is the same as the competition set price which is used to increase customer base and seek larger market share through price. In this Competitive pricing, there are times when the market establishes the price for your product or service. At times like this you are best to follow along with this price. It is important under this pricing structure to track what your competitors are charging, and find out how price aware your customers are. The big advantage of competition based pricing is that you are focused on your industry and therefore your competition. Its often used by u-pick businesses and at farmers markets. An industry focus looks closely at the types of existing and emerging competition. Once you know what your competitors are doing, you can better decide how you will manage your business. Understanding your competition will take some research. You need to understand what you are selling, the types of companies you compete with, the amount and types of substitutes and how companies operate in your industry. Thirdly,
Mark-up pricing: This method generally involves adding a mark- up to the ‘into store’ costs of products. It is not usual for this to result in a recommended retail price determined by the market. Different products can have different mark ups depending on supply and demand or market position. If you intend to sell your product through a retail outlet you will want to check out what their mark up percentage is, and if they sell other similar products what these retail at. There is no point adding a profit margin on for yourself which will price your product significantly higher than that of competitors and therefore out of the market. Fourthly,
Customer based pricing: use price to support product image, set price to increase product sales, design a price range to attract many consumer groups and equally set price to increase volume sales price, a bundle of products to reduce inventory or to excite customers. Most business owners want to know at what price do my customers think my product offers good value? Knowing what your customer wants ensures you take a market focus with your business. You need to find out how your customer feels about various product prices and what they would do if the price changed. Customers change their buying habits according to product price. As a seller you need to find out how your target customers view your product. You also need to find out customer attitudes towards various prices or a price change. And finally,
Demand pricing: Prices using this method are determined by a combination of sales volume (i.e. units or a dollar amount of what you actually sell) and desired profit (i.e. profit left after subtracting the cost of the goods and doing business). You need the ability to calculate in advance the price that generates the optimum ratio of profit to volume.
However, as you take a critical analysis of each pricing method, always try to have a re-think about your business, industry and customer. On this note, before you select any pricing method, be sure you understand the range of options and conditions available and their disadvantages and advantages. On the other hand, you may want to blend several pricing methods to suit your business and the type of product(s) you sell out to the targeted society.
Before you price your product or service you need to consider how much the customer is prepared to pay. This will depend on the type of product or service and who you are targeting – example, a luxury product versus a basic good. If you set your price too low you risk missing out on profit – but if you set it too high then you could end up with excess stock. For this reason it is important to consider the demand for your product. If demand is high you can probably charge a higher price and vice versa. You also need to consider what your competitors are charging. A lower price may cheapen your product or service as well as reduce profits. Sometimes it is better to charge the same or a fraction more and add extra value through the service you can provide or some other differentiating factor that makes you stand out from your competitors. Most of the times, Pricing procedures are strictly based on the principle that identical items must be priced by respondents on each occasion (i.e. matched basket approach). If discontinuities occur, such as an item becoming unavailable, respondents are asked to price a suitable replacement product. The relevant price is excluded from the index calculations until two consecutive monthly quotations are obtained for the substitute. Where replacement products are excluded from the month’s calculations the price trend for all other products in that product group is taken as the price trend for the product excluded. Indirectly, by doing this, a valuation is put on any quality change. This is known as an indirect or implicit method of quality adjustment.
In other to have a complete calculation, firstly, you have to inculcate the habit of calculating your costs in a clear and systematic manner.
To calculate your full cost price, there are four cost components you need to consider:
1. Materials / variable costs. These vary depending on the number of units of your product produced. If you produce goods, or use any product in providing your service, you need to work out the variable and material costs.
2. Labour costs. This could be the income a working proprietor/sole trader requires, and is worked out at an hourly rate.
3. Overhead / fixed costs. These do not vary with production costs – example, rent, insurance, etc. They should include your working from home costs.
4. Profit / mark up. This percentage will be determined by the market. For example, it is not uncommon for a retailer to add 50%-100% mark up, depending on the product, although some products are as low as single digit percentages.
Furthermore, there are simple applications used in wholesale price calculations which aid the producer in a clear price determination. The most important and common method is the usage of the absorption pricing method in calculating the Recommended Retail Pricing, simply referred to as RRP. The five stages of calculating the wholesale price through the absorption pricing have been made so by the Tradegecko Company. This company has a wholesale price calculator that can automatically initiate most of the process, and eventually saving you a whole lot of calculating stress in especially in a large business organization.
Good product prices are important to any successful business. Pricing takes a concrete calculation, outstanding creativity, absolute time, good research, good record-keeping, objective mindedness and flexibility. You need to balance the costs of producing a product with competition and the perceptions of your target customer to select the right product price. For this to be achieved, we are advised to follow these tips to ensure greater pricing success. Be creative in an outstanding manner! Think of new ways to sell more to existing customers or to attract new customer groups. Give a listening ear to your customers! Make a point of noting customer comments in a journal or file. Review them periodically to glean new ideas. Do your homework and researches! Keep good notes of how you arrived at a price so you can make similar assumptions in the future. Boost your records! Good recordkeeping will help you to set a price and to track the performance of your pricing. Cover the basics! The three basics of pricing involve product price, competition and customers. Blend pricing methods to ensure the three basics are in balance. Be flexible and always objective. Constantly review both internal and external factors and calculate how a price change would affect the new situation.
The pertinent theme about this write-up is to ascertain the reasons behind the change in prices of commodities and how it is firmly decided. There are real determinant factors in which these prices come to place. The main strategy/method is the absorption pricing which shows the effect of the prices on every piece of the commodity. This must be done in such a way that the consumers or your customers must be satisfied and ready to accept any future changes in the price. This can be achieved through constant information on the premise of honesty and transparency, as well as inventory evaluation to know when the actual price will be initiated.