What Factors Determine The Cost Of Producing A Good Or Service?

In the narrowest sense, toll is the amount of money charged for a product or service. More broadly, price is the sum of all the values that consumers exchange for the benefits of having or using the production or service.

PRICE – The amt of money charged for a product or service, or the sum of the values that consumers exchange for the benefits of having or using the production or service.

"One tin define price as that which people accept to forego in order to acquire a product or service." What does a buyer think? To a heir-apparent, price is the value placed on what is exchanged. Something of value – unremarkably purchasing power – is exchanged for satisfaction or utility. Purchasing ability depends on a buyer'south income, credit, and wealth.

Buyers' business concern well-nigh price is related to their expectations about the satisfaction or utility associated with a product. Buyers must make up one's mind whether the utility gained in an exchange is worth the purchasing power sacrificed. Different terms can be used to describe price for different forms of exchange, (rent, premium, toll, retainer, fee, involvement, etc.).

Historically, toll has been the major factor affecting heir-apparent selection. This is notwithstanding true in poorer nations, amid poorer groups and with commodity products. However, non-cost factors accept become more important in buyer-choice behavior in recent decades.

Price is besides i of the most flexible elements of the marketing mix. Do you concord ? Unlike product features and channel commitments, price tin can be changed very chop-chop. At the same time, pricing and toll competition is the number-one problem facing many marketers.

SETTING THE Toll – Permit usa now endeavor to empathize the process of how firms set prices. When does a firm ready prices? A firm must ready a price for the kickoff fourth dimension when information technology develops a new production, when it introduces its regular product into a new distribution channel or geographical area, and when information technology enter bids on new contract work. Is Setting prices easy ?. It involves making a number of guesses about the future. You would desire to Know how , an system should proceed as follows:

1. Place the target marketplace segment for the production or service, and determine what share of it is desired and how quickly.
2. Establish the price range that would be acceptable to occupants of this segment. If this looks unpromising, it is nevertheless possible that consumers might be educated to have higher price levels, though this may accept fourth dimension.
3. Examine the prices (and costs if possible) of potential or actual competitors.
4. Examine the range of possible prices within unlike combinations of the marketing mix (e.g. different levels of product quality or distribution methods).
5. Decide whether the product can exist sold profitably at each price based upon anticipated sales levels (i.e. past calculating break-even bespeak) and if so, whether these profits will come across strategic objectives for profitability.
6. If only a modest profit is expected it may be beneath the threshold figure demanded by an organisation for all its activities. In these circumstances, it may be necessary to modify production specifications downward until costs are reduced sufficiently to produce the desired profit.

An system goes through the post-obit steps in setting its pricing policy

At present let u.s.a. talk over the process in detail

• 1) Selecting the pricing Objective –
• 2) Determining the need –
• 3. Estimating Costs –
• 4. Analyzing competitor's costs, prices and offers –
• five. Selecting a pricing method –
• six. Selecting the final Toll –

1) Selecting the pricing Objective –

You would agree that the foremost step is identifying pricing objectives. The visitor beginning decides where it wants to position its marketing offer. The clearer a firm's objectives, the easier information technology is to gear up price. What are pricing objectives ? A visitor can pursue any of five major objectives through pricing: survival, maximum current turn a profit, maximum market share, maximum market skimming, or product-quality leadership.

Companies pursue survival, as their major objective if they are plagued with overcapacity intense contest, or changing consumer wants. As long as prices cover variable costs and some stock-still costs, the company stays in business. Survival is a curt-run objective: in the long run, the firm must learn how to add together value or face extinction.

What happens when companies wants to maximize profit ? Many companies effort to prepare a toll that volition maximize current profits. They estimate the need and costs associated with alternative prices and choose the toll that produces maximum current turn a profit, cash flow or charge per unit of return on investment. This strategy assumes that the firm has knowledge of its demand and cost functions; in reality these are difficult to estimate.

Some companies want to maximize their market share. They believe that a higher sales book volition lead to lower unit of measurement costs and higher long-run profit. They set the everyman price, assuming the market place is price sensitive. The post-obit conditions favor setting a low price. The market is highly toll sensitive, and a low price stimulates market place growth. Product and distribution costs fall with accumulated production experience; A low price discourages actual and potential contest Companies unveiling a new engineering science favor setting high prices to "skim" the market. Sony is a frequent practitioner of market skimming pricing.

Any the specific objective, businesses that utilize toll every bit a strategic tool will turn a profit more than those who simply let costs or the market determine their pricing

ii) Determining the demand –

Following the identification of objectives , the firm needs to determine need. Each price will pb to a different level of demand and therefore have a unlike touch on on a company'southward marketing objectives. In the normal case, need and price are inversely related: the college the price, the lower the demand .In the instance of prestige goods, the demand curve sometimes slopes up. E.grand. Perfume Company raised its price and sold more perfume rather
than less! Some consumers have the higher price to signify a better product. Nonetheless if the price is too high, the level of demand may fall.

Do you lot agree that generally speaking customers are most toll-sensitive to products that price a lot or are bought frequently? They are less price-sensitive to low cost items or items they buy infrequently. They are also less price-sensitive when cost is just a pocket-size function of the total cost of obtaining, operating and servicing the production over its lifetime. A seller tin can charge a higher price than competitors and still go the concern ifthe company tin can convince the customer that it offers the everyman total cost of buying (TCO).

The process of estimating demand therefore leads to
i. Estimating Cost sensitivity of market
ii. Estimating and analyzing demand curve
iii. Determining price elasticity of demand.

3. Estimating Costs –

Demand sets a ceiling on the toll the company can charge for its production. Can you discuss this statement in detail. Costs set the floor. The company wants to accuse a price that covers its toll of producing, distribution and selling the production, including a fair render for its effort and take chances.

Do yous know different costs of organization? How are these costs related with pricing? A company's cost take two forms, fixed and variable. Fixed costs (also known as overhead) are costs that exercise not vary with production or sales revenue. A company must pay bills each month for rent heat, involvement, salaries and then on. , Regardless of output. Variable costs vary directly with the level of production. These costs tend to exist abiding per unit produced. They are called variable because their total varies with the number of units produced. Full costs consists accept the sum of the stock-still and variable costs for any given level of production. Average toll is the toll per unit at the level of production; it is equal to total costs divided by production.

To price intelligently, direction needs to know how its costs vary with different levels of production.

Do y'all want to know what the Japanese do?

The Japanede Method – TARGET COSTING – Costs alter as a result of a full-bodied effort by designers, engineers and purchasing agents to reduce them. The Japanese use a method called target costing. They use marketplace research to establish a new product'south desired functions. Then they determine the price at which the product volition sell, given its entreatment and competitor's prices. They deduct the desired profit margin from this toll, and this leaves the target cost they must achieve.

4. Analyzing competitor's costs, prices and offers –

You would agree that analyzing competitor'south costs, prices and offers is also important factor in setting prices . Within the range of possible prices determined by marketplace demand and company costs, the firm must take the competitor'southward costs, prices and possible price reactions into account.

While demand sets a ceiling and costs set a floor to pricing, competitors' prices provide an in between point yous must consider in setting prices. Learn the cost and quality of each competitor's product or service by sending out comparison shoppers to price and compare. Larn competitors' price lists and buy competitors' products and clarify them. Also ask customers how they perceive the cost and quality of each competitor'due south production or service. If your product or service is similar to a major competitor's product or service, so you will accept to price close to the competitor or lose sales. If your product or service is inferior, you will not be able to charge as much as the competitor. Be aware that competitors might even change their prices in response to your cost.

5. Selecting a pricing method –

Exercise you lot Know any pricing methods ? Every bit consumers have yous been able to distinguish between pricing strategies ? Permit us accept a look at various pricing methods.

WHAT ARE Various PRICING METHODS?

There are 3 pricing methods that can be employed by a business firm:
1. Cost Oriented Pricing
2. Competitor Oriented Pricing
3. Marketing Oriented Pricing

Cost Oriented Pricing

Companies oft utilise cost oriented pricing methods when setting prices. Ii methods are normally used

Full cost pricing – Can you try to explain this? What does a firm do here? Here the business firm determines the direct and fixed costs for each unit of product. The first trouble with Total-cost pricing is that it leads to an increment in price as sales fall. The process is illogical likewise because to arrive at a cost per unit the firm must conceptualize how many products they are going to sell. The is an almost impossible prediction. This method focuses upon the internal costs of the firm equally opposed to the prospective customers' willingness to pay.

Straight (or marginal) Cost Pricing – Practice you have some idea nearly this? This involves the calculation of merely those costs, which are likely to increase as output increases. Indirect or stock-still costs (establish, machinery etc) will remain unaffected whether one unit of measurement or one 1000 units are produced. Like full cost pricing, this method will include a turn a profit margin in the final price. Direct cost approach is useful when pricing services for example. Consider aircraft seats; if they are unused on a flight then the revenue is lost. These remaining seats may be offered at a discount then that some contribution is fabricated to the flight expenses. The chance here is that other customers who paid the full price may find out well-nigh the discounted offering and mutter. Direct costs and so, indicate the everyman price at which it is sensible to have business if the alternative is to allow mechanism, shipping seats or hotel rooms lie idle.

Contest-based approach

Going-Rate Pricing – In going-rate pricing, the firm bases its toll largely on competitors' prices, with less attention paid to its own costs or to need. The business firm might charge the same, more, or less than its major competitors. Where the products offered by firms in a sure industry are very similar the public often finds difficulty in perceiving which firm meets at that place needs best. In cases like this (for case in financial services and delivery services) the business firm may try to differentiate on delivery or service quality in an attempt to justify a college selling toll.

Competitive Behest – Many contracts are won or lost on the basis of competitive bidding. The most usual procedure is the drawing up of detailed specifications for a production and putting the contract out for tender. Potential suppliers quote a price, which is confidential to themselves and the heir-apparent. In sealed-bid pricing (i.e. just known to client and not to the other parties tendering for the service), firms bid for jobs, with the firms basing the price on what information technology thinks other firms will be bidding rather than on its ain costs or demand. All other things being equal the buyer will select the supplier that offers the lowest toll.

Marketing Oriented Pricing

The cost of a product should be fix in line with the marketing strategy. The danger is that if price is viewed in isolation (as would exist the case with total cost pricing) with no reference to other marketing decisions such equally positioning, strategic objectives, promotion, distribution and production benefits. The way around this trouble is to recognize that the pricing decision is dependent on other earlier decisions in the marketing planning procedure. For new products, price volition depend upon positioning, strategy, and for existing products price will be affected by strategic objectives.

half-dozen. Selecting the final Price –

Pricing methods narrow the range from which the company must select its terminal toll. In selecting that cost, the company must consider additional factors, including psychological pricing, gain and take chances pricing, the influence of other marketing -mix elements on cost, company -pricing policies, and the impact of price on other parties.

Source: https://www.marketing91.com/pricing/

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