WHAT DOES THE PRICE CONSIST OF?
One of the problematic issues for any business is determining the price of a product being manufactured, be it a product or a service. How much is what I do? Why exactly so many? Will they buy it at that price? And if not, what will they be? There are many questions.
Price stimulates both demand and production, allows you to compare costs with performance, economically determines the quality and value of the product for the consumer, and also performs many other functions. Therefore, it is important to try to calculate the price correctly from the very beginning.
To understand how to do this, let’s look at what the retail price structure consists of.
- The full cost of production. This is the basis of the price, the sum of all types of costs of resources for the production of a good or service.
- Profit. The rate of return is quite individual and differs depending on the type of business, company size, or market.
- The total cost and profit determine the wholesale price of the product.
- Further, the price is formed by various kinds of markups of sales and trade intermediaries, if they exist.
- The end result is the retail price that the consumer pays for your product or service.
What else can affect the final price?
- The value of the product or its usefulness. The more valuable the product is in the eyes of the buyer, the more benefit it will bring, the higher the price can be. And in this case, the cost price can be a very small part of the price, and the profit and markups can be a large one.
- Expenses. Despite the fact that the price is usually calculated on the basis of cost and profit margins, this factor alone cannot be considered in isolation. The market can estimate the value of the product higher or lower, which will lead to a loss of part of the profit.
- Competition. Competitor prices should always be monitored.
- Stimulation. The more information the buyer has about the product, the more opportunities for its implementation. However, the funds spent on sales promotion increase the cost of the product.
- Method of selling goods. The more links in the chain between the producer and the consumer, the less the opportunity to influence the price. The more intermediaries there are, the more expensive the product will become for the consumer.
- Public opinion. This is the idea of the consumer of a product or service about how much he should pay. Here it is worth paying attention to the quality of the product, which distinguishes it from analogs on the market, as well as to the consumer’s awareness of the product.
- Service. Naturally, the more expensive the service (delivery, installation, staff training, after-sales service, etc.), the higher the price will be.
A comprehensive accounting of these factors will allow not only to take into account all costs but also to show the advantages of the product for the consumer over competitors.
And now that we have found out and determined for ourselves what can affect the price, we can start calculating it.
There are several ways to do this. They are usually classified into three groups:
- based on competition.
It is obvious which factor lies at the heart of each of them.
So costly methods involve taking into account, first of all, the entire set of costs.
Value-based methods are based on the consumer’s perception of the price of a product. The calculation of prices by these methods is carried out after studying statistical data and experimenting with the price. This group of calculation methods also includes discounted prices (for payment in cash, for the number of purchased goods, etc.), as well as “following the leader” when the average market price is set. The latter method makes sense to apply when it is difficult to take into account your own costs and predict the market reaction.
The competition-based method is used to form an offer at auctions and various tenders. In this case, the price is influenced by the possible proposals of competitors, and not by demand or own costs.