Pricing

Although it may seem simple at first, finding the right price is not obvious. Pricing is not an objective process at all.

One of the most important elements of preparing a marketing plan is establishing the price of the offered product or service. It is no coincidence that the most frequently used division of the marketing mix, the 4P, also treats price formation as a separate area.

When determining the price, one of our options is cost-based pricing.

The costs required to produce a product can be divided into two major groups: fixed and variable costs. From a calculation point of view, accounting for variable costs is the simpler task. These are directly related to the production of the product. This group includes, for example, the wages of those involved in production and the taxes and contributions related to the payment of wages, i.e. public dues. But this includes the costs of raw materials, packaging, storage and transportation.

Fixed costs include the general costs of the business. Examples include overhead costs, marketing and communication costs, or leasing and rental fees paid by the business. Calculating them is a bit more complicated. These costs are not directly related to the product in question. In order to be able to include these in the price of a product, we must be aware of, for example, how much product the company sells during a business year. So, we need to know how much sales revenue we have to project the fixed costs to in order to determine the specific cost per unit of product.  

The "cost-based" price level can be determined by knowing the fixed and variable costs. Below this level, the activity is unprofitable: knowing the profit expected by the owner, the principle price of the product can be determined. 

It all looks a little different in the world of services. The price (fee) of these is usually more difficult to determine well than that of physical products. There are many service activities where prices are linked to a result. Examples include hairdressing, maintenance, and repair, where the profit or loss, P&L is a finished hairstyle or a repaired washing machine, for example. For these activities, the price is largely independent of how long it takes to complete the work. In such a case, either several prices must be created, or the price must be determined in such a way that it fits all cases on average. 

At the same time, there are many activities for which it is difficult to estimate in advance how much time it will take to complete. Examples include expert work, educational activities or cleaning. In these cases, cost-based pricing does not provide much guidance, so hourly rates may be the best solution. 

At the same time, the previous ones still say little about how much the given product or service can be sold for in reality in the market competition. If the company does not produce a completely new product that is not yet known on the market, the other essential pricing information is the prices of the competitors. You must collect this information during market survey. In the literature, this is called benchmark-based pricing. 

The benchmark can be based, for example, on the price of a similar product or service in a similar neighborhood or in a targeted consumer in the target group. The price of similar products and services available on the Internet can also be a benchmark. Obviously, there will be a maximum and a minimum price in the market. Taking these into account, it is possible to decide where the company places the price of its own products.

However, it is important to note that all of this is only an initial estimate. There is no guarantee that the new entrant product or service will be accepted by consumers at this price from the moment of entry. It is also easy to imagine that you will probably not find the ideal price many times. This is not a problem. The task is to get as close as possible to the price that is optimal for your company.