MODULE 7SETTING THE PRICE

OVERVIEW

Setting the price for a product or service should not be a matter of guesswork. At a minimum, the price must take into account the cost of producing the product or providing the service and the amount of profit that the entrepreneur wants to make.

The price may also be influenced by marketing factors such as the product or services brand and how it is perceived in the marketplace or by market-related factors, such as an abundance or lack of other providers for the product or service or the prices of competitors products or services.

FACTORS INFLUENCING A PRODUCTS PRICE

Cost per unit of product Level of profits expected from the sale of the product Competitors prices for the same product

When calculating the basic selling price, you need to ignore the competitors price for the same product. Using the competitors price to influence your pricing without knowing how much they need to earn to cover their own costs is very dangerous, as competitors may be using cheaper materials, working longer hours, using lower-cost workers, etc.

DETERMINING THE SELLING PRICE

You need to know the:

Cost per unit of the product Level of profit that you wish to make Amount of money you expect to receive from sales

FIXED COSTS AND VARIABLE COSTS

FIXED COSTSCosts that remain the same, regardless of the level of production.E.g.: equipment, furniture and fittings etc.

VARIABLE COSTSCosts that increase or decrease, depending on your level of production.E.g.: utilities, raw materials used in the producing goods, packaging etc.

BREAK-EVEN PRICE

Price at which the business is not making either a profit or a loss.

If you sell for less than this price, you will make a loss.

Used in determining your minimum price. Calculated as follows:

Break-Even Price = Total Fixed Cost + Total Variable Cost / Number of Units.

Where Number of Units means the number of units that can be made based on the amount of resources in the variable costs calculation.

PRICING BASED ON COMPETITOR PRICES

Things to be aware of when basing your prices on competitors prices

Using a competitors price as a guideline without knowing your own break-even price is very dangerous Competitors may be using cheaper materials, working longer hours, using lower-cost workers etc. Therefore using the competitors price as the only basis for setting your prices may set you up to make a loss Charging lower prices than your competitors may result in increasing the demand but it will also lower the profits Charging higher prices than your competitors may result in lower sales due to low demand and this will also lower the profits

ACTIVITY

ACTIVITY 1Calculating the selling price

Using the following information, calculate the basic selling price for one of Maris home-made cakes:

Maris total variable costs, based on the ingredients being enough to make 40 cakes, came to 84 Dollars

Maris total fixed costs came to 660 Dollars

Mari aims to make at least, 20% profit from her business

1. Calculate Maris total costsTotal Cost = Total Fixed Costs + Total Variable Costs2. Calculate Maris profit based on her target of 20%3. Calculate how much money Mari needs to earn in sales cover her total costs and earn her desired profitTarget Income from Sales = Total Cost + Desired Profit4. Use the following formula to calculate the selling price per unitSelling Price per Unit = (Total Cost + Desired Profits) / Number of Units Where Number of Units means the number of units that can be made based on the amount of resources in the variable costs calculation

ACTIVITY 2Calculating the Break-Even Price

Using the following information, calculate break-even price for one of Maris home-made cakes:

Maris total variable costs came to 84 Dollars

Maris total fixed costs came to 660 Dollars

Number of units to be produced was 40 cakes

Formula is:Break-Even Price = Total Fixed Cost + Total Variable Cost / Number of Units