Cara menentukan Pricing Strategies

Pricing Strategy

How much should you charge for your product or service?

By Scott Allen

Entrepreneurs Expert

One of the most difficult, yet important, issues you must decide as an entrepreneur is how much to charge

for your product or service. While there is no one single right way to determine your pricing strategy,

fortunately there are some guidelines that will help you with your decision.

Before we get to the actual pricing models, here are some of the factors that you need to consider:

Positioning - How are you positioning your product in the market? Is pricing going to be a key part of that

positioning? If you're running a discount store, you're always going to be trying to keep your prices as low

as possible as (or at least lower than your competitors). On the other hand, if you're positioning your

product as an exclusive luxury product, a price that's too low may actually hurt your image. The pricing

has to be consistent with the positioning. People really do hold strongly to the idea that you get what you

pay for.

Demand Curve - How will your pricing affect demand? You're going to have to do some basic market

research to find this out, even if it's informal. Get 10 people to answer a simple questionnaire, asking

them, "Would you buy this product/service at X price? Y price? Z price?" For a larger venture, you'll want

to do something more formal, of course -- perhaps hire a market research firm. But even a sole

practitioner can chart a basic curve that says that at X price, X' percentage will buy, at Y price, Y' will buy,

and at Z price Z' will buy.

Cost - Calculate the fixed and variable costs associated with your product or service. How much is the

"cost of goods", i.e., a cost associated with each item sold or service delivered, and how much is "fixed

overhead", i.e., it doesn't change unless your company changes dramatically in size? Remember that your

gross margin (price minus cost of goods) has to amply cover your fixed overhead in order for you to turn

a profit. Many entrepreneurs under-estimate this and it gets them into trouble.

Environmental factors - Are there any legal or other constraints on pricing? For example, in some cities,

towing fees from auto accidents are set at a fixed price by law. Or for doctors, insurance companies and

Medicare will only reimburse a certain price. Also, what possible actions might your competitors take?

Will too low a price from you trigger a price war? Find out what external factors may affect your pricing.

The next step is to determine your pricing objectives. What are you trying to accomplish with your

pricing?

Short-term profit maximization - While this sounds great, it may not actually be the optimal approach for

long-term profits. This approach is common in companies that are bootstrapping, as cash flow is the

overriding consideration. It's also common among smaller companies hoping to attract venture funding

by demonstrating profitability as soon as possible.

Short-term revenue maximization - This approach seeks to maximize long-term profits by increasing

market share and lowering costs through economy of scale. For a well-funded company, or a newly public

company, revenues are considered more important than profits in building investor confidence. Higher

revenues at a slim profit, or even a loss, show that the company is building market share and will likely

reach profitability. Amazon.com, for example, posted record-breaking revenues for several years before

ever showing a profit, and its market capitalization reflected the high investor confidence those revenues

generated.

Maximize quantity - There are a couple of possible reasons to choose the strategy. It may be to focus on

reducing long-term costs by achieving economies of scale. This approach might be used by a company

well-funded by its founders and other "close" investors. Or it may be to maximize market penetration -

particularly appropriate when you expect to have a lot repeat customers. The plan may be to increase

profits by reducing costs, or to upsell existing customers on higher-profit products down the road.

Maximize profit margin - This strategy is most appropriate when the number of sales is either expected

to be very low or sporadic and unpredictable. Examples include custom jewelry, art, hand-made

automobiles and other luxury items.

Differentiation - At one extreme, being the low-cost leader is a form of differentiation from the

competition. At the other end, a high price signals high quality and/or a high level of service. Some people

really do order lobster just because it's the most expensive thing on the menu.

Survival - In certain situations, such as a price war, market decline or market saturation, you must

temporarily set a price that will cover costs and allow you to continue operations.

Now that we have the information we need and are clear about what we're trying to achieve, we're ready

to take a look at specific pricing methods to help us arrive at our actual numbers.

As we said earlier, there is no "one right way" to calculate your pricing. Once you've considered the various

factors involved and determined your objectives for your pricing strategy, now you need some way to

crunch the actual numbers. Here are four ways to calculate prices:

Cost-plus pricing - Set the price at your production cost, including both cost of goods and fixed costs at

your current volume, plus a certain profit margin. For example, your widgets cost $20 in raw materials

and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs

come to $30 per unit. Your total cost is $50 per unit. You decide that you want to operate at a 20% markup,

so you add $10 (20% x $50) to the cost and come up with a price of $60 per unit. So long as you have your

costs calculated correctly and have accurately predicted your sales volume, you will always be operating

at a profit.

Target return pricing - Set your price to achieve a target return-on-investment (ROI). For example, let's

use the same situation as above, and assume that you have $10,000 invested in the company. Your

expected sales volume is 1,000 units in the first year. You want to recoup all your investment in the first

year, so you need to make $10,000 profit on 1,000 units, or $10 profit per unit, giving you again a price of

$60 per unit.

Value-based pricing - Price your product based on the value it creates for the customer. This is usually the

most profitable form of pricing, if you can achieve it. The most extreme variation on this is "pay for

performance" pricing for services, in which you charge on a variable scale according to the results you

achieve. Let's say that your widget above saves the typical customer $1,000 a year in, say, energy costs.

In that case, $60 seems like a bargain - maybe even too cheap. If your product reliably produced that kind

of cost savings, you could easily charge $200, $300 or more for it, and customers would gladly pay it, since

they would get their money back in a matter of months. However, there is one more major factor that

must be considered.

Psychological pricing - Ultimately, you must take into consideration the consumer's perception of your

price, figuring things like:

Positioning - If you want to be the "low-cost leader", you must be priced lower than your

competition. If you want to signal high quality, you should probably be priced higher than most

of your competition.

Popular price points - There are certain "price points" (specific prices) at which people become

much more willing to buy a certain type of product. For example, "under $100" is a popular price

point. "Enough under $20 to be under $20 with sales tax" is another popular price point, because

it's "one bill" that people commonly carry. Meals under $5 are still a popular price point, as are

entree or snack items under $1 (notice how many fast-food places have a $0.99 "value menu").

Dropping your price to a popular price point might mean a lower margin, but more than enough

increase in sales to offset it.

Fair pricing - Sometimes it simply doesn't matter what the value of the product is, even if you

don't have any direct competition. There is simply a limit to what consumers perceive as "fair". If

it's obvious that your product only cost $20 to manufacture, even if it delivered $10,000 in value,

you'd have a hard time charging two or three thousand dollars for it -- people would just feel like

they were being gouged. A little market testing will help you determine the maximum price

consumers will perceive as fair.

Now, how do you combine all of these calculations to come up with a price? Here are some basic

guidelines:

Your price must be enough higher than costs to cover reasonable variations in sales volume. If

your sales forecast is inaccurate, how far off can you be and still be profitable? Ideally, you want

to be able to be off by a factor of two or more (your sales are half of your forecast) and still be

profitable.

You have to make a living. Have you figured salary for yourself in your costs? If not, your profit

has to be enough for you to live on and still have money to reinvest in the company.

Your price should almost never be lower than your costs or higher than what most consumers

consider "fair". This may seem obvious, but many entrepreneurs seem to miss this simple

concept, either by miscalculating costs or by inadequate market research to determine fair

pricing. Simply put, if people won't readily pay enough more than your cost to make you a fair

profit, you need to reconsider your business model entirely. How can you cut your costs

substantially? Or change your product positioning to justify higher pricing?

Pricing is a tricky business. You're certainly entitled to make a fair profit on your product, and even a

substantial one if you create value for your customers. But remember, something is ultimately worth only

what someone is willing to pay for it.

Competition-Based Pricing

In economics, competition is the rivalry among sellers trying to achieve such goals as increasing profits,

market share, and sales volume by varying the elements of the marketing mix: price, product, distribution,

and promotion. Merriam-Webster defines competition in business as "the effort of two or more parties

acting independently to secure the business of a third party by offering the most favorable terms.” It was

described by Adam Smith in The Wealth of Nations (1776) and later economists as allocating productive

resources to their most highly-valued uses and encouraging efficiency. Smith and other classical

economists before Cournot were referring to price and non-price rivalry among producers to sell their

goods on best terms by the bidding of buyers, and not necessarily to a large number of sellers or to a

market in final equilibrium.

Competitive-based pricing, or market-oriented pricing, involves setting a price based upon analysis and

research compiled from the target market. With competition pricing, a firm will base what they charge on

what other firms are charging. This means that marketers will set prices depending on the results from

their research. For instance, if the competitors are pricing their products at a lower price, then it's up to

them to either price their goods at a higher or lower price, all depending on what the company wants to

achieve.

Competitive Market Pricing

Status-quo pricing, also known as competition pricing, involves maintaining existing prices or basing

prices on what other firms are charging.

One advantage of competitive-based pricing is that it avoids price competition that can damage the

company. Disadvantages include that businesses have to attract customers in other ways, since the price

will not grab the customer's interest. The price may also barely cover production costs, resulting in low

profits.

Source:

Boundless. “Competition-Based Pricing.”

Boundless Business. Boundless, 21 Jul.

2015. Retrieved 23 Sep. 2015

Cost Plus Pricing

Cost plus pricing is a cost-based method for setting the prices of goods and services. Under this approach,

you add together the direct material cost, direct labor cost, and overhead costs for a product, and add to

it a markup percentage (to create a profit margin) in order to derive the price of the product. Cost plus

pricing can also be used within a customer contract, where the customer reimburses the seller for all costs

incurred and also pays a negotiated profit in addition to the costs incurred.

The Cost Plus Calculation

ABC International has designed a product that contains the following costs:

Direct material costs = $20.00

Direct labor costs = $5.50

Allocated overhead = $8.25

The company applies a standard 30% markup to all of its products. To derive the price of this product, ABC

adds together the stated costs to arrive at a total cost of $33.75, and then multiplies this amount by (1 +

0.30) to arrive at the product price of $43.88.

Advantages of Cost Plus Pricing

The following are advantages to using the cost plus pricing method:

Simple. It is quite easy to derive a product price using this method, though you should define the

overhead allocation method in order to be consistent in calculating the prices of multiple

products.

Assured contract profits. Any contractor is willing to accept this method for a contractual

agreement with a customer, since it is assured of having its costs reimbursed and of making a

profit. There is no risk of loss on such a contract.

Justifiable. In cases where the supplier must persuade its customers of the need for a price

increase, the supplier can point to an increase in its costs as the reason for the price increase.

Disadvantages of Cost plus Pricing

Ignores competition. A company may set a product price based on the cost plus formula and then

be surprised when it finds that competitors are charging substantially different prices. This has a

huge impact on the market share and profits that a company can expect to achieve. The company

either ends up pricing too low and giving away potential profits, or pricing too high and achieving

minor revenues.

Product cost overruns. Under this method, the engineering department has no incentive to

prudently design a product that has the appropriate feature set and design characteristics for its

target market (see the target costing method). Instead, the department simply designs what it

wants and launches the product.

Contract cost overruns. From the perspective of any government entity that hires a supplier under

a cost plus pricing arrangement, the supplier has no incentive to curtail its expenditures - on the

contrary, it will likely include as many costs as possible in the contract so that it can be reimbursed.

Thus, a contractual arrangement should include cost-reduction incentives for the supplier.

Ignores replacement costs. The method is based on historical costs, which may have changed. The

most immediate replacement cost is more representative of the costs incurred by the entity.

Evaluation of Cost plus Pricing

This method is not acceptable for deriving the price of a product that is to be sold in a competitive market,

primarily because it does not factor in the prices charged by competitors. Thus, this method is likely to

result in a seriously overpriced product. Further, prices should be set based on what the market is willing

to pay - which could result in a substantially different margin than the standard margin typically assigned

using this pricing method.

Cost plus pricing is a more valuable tool in a contractual situation, since the supplier has no downside risk.

However, be sure to review which costs are allowable for reimbursement under the contract; it is possible

that the terms of the contract are so restrictive that the supplier must exclude many costs from

reimbursement, and so can potentially incur a loss.

Pricing Technique: “Value in Use”

Thomas H. Gray

“Value in Use” pricing means the price is based on the product’s value to the customer, not the

manufacturer’s cost of production. For example, if a normal saw blade is priced at $7, and you create one

that lasts 4 times as long, the value to the customer of the long-life blade would be $28, aside from saving

the time involved in changing blades. What price should you set for the long-life blade?

Assuming the blade-changing effort is minimal, you will want to set your price below $28, since that is the

point where the customer is indifferent to one of your new blades vs. four of the old blades. A price level

somewhere between $14 and $21 seems reasonable if there is no competition for your new blade. If you

price it at $17, the buyer and the seller each take half the increase in value. The difference is large enough

to get the buyer’s attention and make him consider changing his habitual purchase behavior.

Using $17 as a test price level, you can then consider your development costs and any production cost

difference between the old and the new blade, to see the effect of this price level on your margins. The

price you choose should be low enough that customers see significant value, but high enough to generate

premium margins while leaving room for price cuts when competitors match your innovation.

Obviously, this is not “cost-based pricing,” and it is not “pricing to competition.” The price is based on the

value to the customer who buys the long-life blade. Only after establishing that value do you consider

your cost and potential competitive responses.

Provide an Upgrade Path

Many customers will quickly understand the higher value of the higher-priced long-life blade. But may not

need this value yet. To widen the market, consider an upgrade path for those not yet ready to change.

To illustrate, we need to change our example. Consider a server equipped with new software enabling it

to work so fast that it can do the work of four servers. You want to set prices for three customer groups:

1. Data-Hogs: Buyers who need to buy more than two servers.

2. Entrants: Those who think they need to buy only one or two servers

3. Upgraders: Those who already own one server, and then realize the need to add one or more new

servers.

Assume the old server price is $10,000, and you decide to price the new hardware/software package at

$20,000. This is great deal for data-hogs, and delivers high margin for the seller. Smaller data users, the

other two segments, are attractive for their numbers and future growth, but $20,000 is a much higher

price than your competitor offers for an old-style server adequate for their current needs.

The solution is to continue to offer your old server at $10,000, like the competition, but enhance its value

vs. the competition by offering to equip it with the new four-times-faster software when the customer is

ready. This is an upgrade path.

How would you price this software-only retrofit? The upgrade price should be more than $10,000, to avoid

competing with your new server priced at $20,000. It should be less than $20,000, because otherwise the

customer who already has one server could just buy two more old servers from you or your competitor,

and see no price difference. A reasonable price for the software-only upgrade would be 1.5 times the

price of an old server: $15,000.

This table summarizes a “value in use” pricing plan for this example:

Those who buy the package pay $20,000, while those who buy in two steps pay $25,000. Yet previous

customers get the new technology for $5,000 less than new buyers, recognizing the value of the current

customer base.

Offering the choice of a software-only upgrade sets a value for the software. Here is a side benefit. The

retrofit choice actually defines the value of the package offer as a better deal: new hardware for half the

old hardware price, plus growth at no cost.

By offering the upgrade as an alternative to the package offer, the seller is actually enhancing the

perception of the package offer’s value. This is a good example of the “decoy effect” that results from

offering different alternatives.

1.

2. What is Advertising?“Advertising is any paid form of nonpersonalpresentation and promotion of ideas, goods, orservices by an identified sponsor.”Philip Kotler

3. “Advertising not only plays a vital role in promotingour economic growth but it is a colorful anddiverting aspect of life.”Peter Drucker

4. Classification of AdvertisingObjectives:

Informative Advertising

Persuasive Advertising

Reminder Advertising

Reinforcement Advertising

5.

6. Mission

Increase Sales

Brand Building

7. Money: Factors affecting budget decisions

Stage in product life cycle

Market share and consumer base

Competition and clutter

Advertising frequency

Product substitutability

8. Message:

Message generation

Message evaluation and selection

Message execution

Social-responsibility review

9. Media:

Reach, frequency, impact

Major media types

Specific media vehicles

Media timing

Geographical media allocation

10.

11. Media Timing Pattern

Continuity

Concentration

Flighting

pulsing

12. Measurement

Communication impact o Consumer feedback method o Portfolio test o Laboratory test

Sales impact