Complete Understanding of Costs

However, costs are important. They pro­vide a base figure below which one cannot price the product. Even when adopting a marketing approach to set­ting prices we must aware of costs and how they are structured. There is the classic break-even chart (figure 1) shows the need to balance price and likely sales vol­ume to ensure that the business can reach the break-even point.

Breakeven and Pricing and Sales Strategy

The two revenue lines show the effect of a low price and high volume against high price and low volume (assuming the same costs structure). As part of the marketing strategy it is necessary to decide what sort of business is desired and therefore which approach is appropriate to the company strategy. Apart from all the other issues there is a balancing act between price and volume. The decision comes down to the prod­uct(s), resources and the level of risk is prepared to take. Discussion of break-even, costs and risk would need an article of its own.

A full understanding of costs is needed and not just the direct costs but overheads, marketing and the real cost of sales.

Other Considerations for Setting Prices

Due to competitive pressures there will be a need to face other challenges. How does one respond if a similar product is launched at a lower price; or even how do other products affect pricing strategy?

Consider the challenge faced by branded products manufacturers when the supermarket chains started to intro­duce own brands. They had several choices. They could make the products under contract; they could ignore them and probably lose volume. Or they could do as many did and introduce their own low-price/high-value brands to compete; but of course such low-profit brands were going to take sales from their own high-profit products.

Profit cannibalisa­tion is another factor in pricing strategy and there are no simple universal answers. In the example it was usually a matter of taking a small profit on some sales rather than losing it all because they were not in that segment of the market.

Maximise Profitable Business

Profitable pricing strategies are not as simple as often portrayed — indeed it is fundamen­tal to the business strategy. However, a little research, an understanding of costs and a full appreciation of the mar­ket allow prod­uct positioning to maximise the profit for the business.