Pricing a product is one of the essential steps in achieving the success of an enterprise. The entrepreneur should carefully select a pricing system that suits the description and stage of a business development. Thus, when a product is new and is about to be introduced into the market and attract customers, the pricing system to be adopted by the entrepreneur must be different from when the product is seasoned in the market and has already won many clients. However, to be able to determine the total cost of an item, two main components must be considered. These are the Variable cost (direct costs or production costs) and Fixed costs (indirect costs also called “overheads”).
1. Variable costs (direct costs or production costs): These consist of the cost of raw materials for production and the wages of workers. These are the direct costs of making a product. They are also called “variable” cost because the cost of materials and cost of production is not stable at all times. They vary from day-to-day and item to item. The quantity of the materials changes as the level of production changes. For example, the cost of producing ten wallets a day is different in terms of the cost of producing fifteen wallets a day.
2. Fixed costs (indirect costs): These are costs that do not directly affect the cost of a product. They are fixed and stays the same whether the level of production changes or not. They include the cost of rent, lighting, taxes, adverts, depreciation costs of tools and equipment, telephone cost, transportation, and postage.
In determining how to price a product, various factors have to be considered. The primary factors that have to be considered in pricing a product are discussed below.
1. Costs of the product (total production cost): This refers to the addition of both the variable and fixed costs.
2. Profit margin: It is a percentage that is added to the total cost of production as profit. Most enterprises usually rate it five percent (5%) to ten percent (10%) of the total production cost.
3. Price settings or strategies: There are basically five pricing systems or strategies. They have been discussed below.
a. Introductory Price (also called market penetration price): That is the deliberate pricing of a product below the actual market price to attract market share. It is done relatively for a short period of time to attract a market for a new product released by an enterprise.
b. The “going price” system: This is the pricing of a product the same as its counterpart product produced by other suppliers already in the market.
c. The “cost plus” system: This is the addition of a percentage of the total cost as profit.
d. The price discrimination system, also known as “what the market can bear”: This is the pricing of the same product differently depending on the income rates of the residents in the area. For example, selling the same product at a higher price in a city like Accra and relatively at a lower price in a town or village.
The “price differentiation” system: This pricing system varies the price of the same product because of the difference in their packages. The price is higher when the material used for the package is expensive but the price is lower when the material used for the package is cheap. Sometimes the product may be combined with other additives and priced differently.