02/05/2020
WHAT DETERMINES YOUR PRODUCT/ SERVICE PRICE?
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Every business man goes into business with at least an aim of making profits out of their venture. How the profits are achieved are determined by numerous factors among which there is Price of the commodity or service. How price is determined is the key, but most entrepreneurs or business people take it upon themselves to determine the price which will give them the highest profit without considering other factors that play in the market.
The market in which you sell your goods or services is like a football pitch. There are rules to play by (factors), there is a Referee (the Customer) and you the player. For you to win, you will have to handle the matter seriously and with caution. As a business person, you should never assume that all factors are constant. Factors that determine profit making are always dynamic. If you are looking for a suitable and sustainable price for your commodity/service/good, you will need to answer the following questions:
Why are you pricing? There may be different reasons for setting your prices, so the first question you need to ask your self is why a my pricing my services or commodities?. Most people price their commodities to make profit, meaning their selling price will be higher than their cost price, while others especially market leaders price their goods to set prices for the market for others t follow. Another entrepreneur may price their goods so that they stay afloat in the market. In this case, they will not mind about profits but cash flow.
At What Stage are you in Business? As an Entrepreneur, you will need to understand the stage of the business life cycle your business is. At early/ Entry stage of business, It is always wiser for the business to have lower prices in order to gain clientele and stay in business While for growth Stage, Entrepreneurs are most likely to have higher prices for goods.
Your Price is dependent upon your business life cycle.
Which market System are you serving? While it is dependent on you to determine your prices, It is also prudent for you to understand the market system you are operating in. In a Perfectly Competitive market, It is important to note that the market has infinite buyers and infinite sellers. This means if you alter your prices a little bit, your buyers have a wide array of alternatives to buy from. In a monopoly, you are the only seller and there are may buyers; here you are free to alter prices whichever way you want. Understanding your market helps you understand your competitors' prices in the market so you can make a more informed decision on price.
What are your Costs? By understanding and answering what your costs of production or Cost of making a sale are, you will be positioned to price your goods well. When pricing, You need to understand that the you will add your direct costs and overheads as well as your desired profits and of course taxes payable to get what your price will be. Often times, Entrepreneurs make a mistake of only adding the costs and profit to get their selling price. Taxes payable should also be factored into your selling price if you are to make a considerable profit.
What are the Customers Response to Price changes? If you can answer what the customers or clients are towards price changes, then you can clearly understand how to price your goods for the intended customers. Some customers are too responsive in that if you merely change the price by 100/- they may have to look for alternatives while other customers may still buy the same amount of goods at a higher price. if you are operating in a market of the rich, price changes do not matter but for the poor, price changes also demand a change in the purchasing power
What Products are you selling? Before settling for a price, understand the type of products you are selling. As you determine the type of goods you sell, you will understand the nature of the demand for those commodities. For example, A Buggatti or Lamborghini car will be bought at a higher price than at a lower price because its a good of ostentation (It shows status) . Goods like salt will always be bought regardless of the increase in price because they are essential goods. The difference in the nature and type of goods is a bigger determinant of your prices in the market.
Determining the price of the commodity is up to you to decide but prices that are effective and bring in profit are determined by factors we have mentioned above among other factors especially in the market.
Tumusiime Fred Francis
Business and Tax Consultant
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