Published on September 22, 2014
Industry Studies 1 Make, Take and Sell Challenge: How would you price your product? Topic Number: 6
Overview By now you all should have a clear idea about how you would develop your product and take it to market. Now its time to ensure that it is appealing to customers. This workshop is focused on determining and developing the right pricing strategy for your product to ensure its commercially viable and at the right price point for customers. You will consider the various ways a product is priced across the CGI and thereafter give you time to consider your own approach. You will be expected to draw up a cost analysis and come up with an appropriate pricing structure.
Learning outcomes for these workshops • Develop and determine the optimal pricing structure for your product • Conduct a cost analysis to determine your break even point for your product • Critically evaluate the various pricing approaches adopted by the CGI
Importance of pricing The bitterness of poor quality remains long after the sweetness of low price is forgotten Aldo Gucci Price is what you pay. Value is what you get. Warren Buffett
Have you heard of pay what you want pricing? View video: https://www.youtube.com/watch?v=PzvNXI2pkGA
Why is pricing important? Enables a company to make a profit Signals product standard Influences purchase decision Captures value back from customers
Task 1: What are the key influences you should consider when pricing your product? In your groups take 10 minutes to consider the key influencing factors when developing your product price. Take 10 minutes
Task 1: What are the key influences you should consider when pricing your product? Marketing objectives Government regulations Customer perceptions Market demand Competition
Different Pricing Approaches Today we will consider 3 strategies… Cost-based Pricing Value-based Pricing Psychological Pricing
What is cost based pricing? • Using the cost of production as the basis for pricing a product • Here the selling price of a product A will be the cost to produce it plus a margin • It includes: • Direct and indirect costs • Additional amount to generate a profit
Types of Costs Fixed Variable Direct Indirect Direct costs can be defined as costs which can be accurately traced to a cost object with little effort. Costs which cannot be accurately attributed to specific cost objects are called indirect costs. Fixed costs are costs that are independent of output. These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include wages, utilities and materials
Task 2: Considering your costs In your groups take 10 minutes to consider the key costs that you will encounter when developing your product. Also consider the amount of profit you would like to make and come up with a final price. Take 10 minutes
Task 2: Considering your costs Each group has 5 minutes to feedback
Value-based pricing Card Players-Paul Cezanne How much did this cost to produce?
Value-based pricing Value-based pricing (also value optimized pricing) is a pricing strategy which sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product or historical prices. Where it is successfully used, it will improve profitability due to the higher prices without impacting greatly on sales volumes. The approach is most successful when products are sold based on emotions (fashion), in niche markets, in shortages (e.g. drinks at open air festival at a hot summer day) or for indispensable add-ons (e.g. printer cartridges, headsets for cell phones).
Value-based pricing Pricing on planes How much is the popcorn?!
What is psychological pricing? Psychological pricing (also price ending, charm pricing) is a pricing/marketing strategy based on the theory that certain prices have a psychological impact. The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or £2.98. Consumers tend to perceive “odd prices” as being significantly lower than they actually are, tending to round to the next lowest monetary unit. Thus, prices such as $1.99 are associated with spending $1 rather than $2. The theory that drives this is that lower pricing such as this institutes greater demand than if consumers were perfectly rational.
An example in action
Task 3: Your pricing strategy In your groups take 10 minutes to consider the pricing strategy that you adopt and the final cost of your product Take 10 minutes Cost-based Pricing Value-based Pricing Psychological Pricing
Task 3: Your pricing strategy Each group has 5 minutes to feedback
End of Workshop Note: This recording is for your personal use only and not for further distribution or wider review. © Pearson College 2013
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