Industry Studies 1

Make, Take and Sell Challenge:

How would you price your product?

Topic Number: 6

By now you all should have a clear idea about howyou would develop your product and take it to market.Now its time to ensure that it is appealing tocustomers.

This workshop is focused on determining anddeveloping the right pricing strategy for your productto ensure its commercially viable and at the rightprice point for customers.

You will consider the various ways a product is pricedacross the CGI and thereafter give you time toconsider your own approach. You will be expected todraw up a cost analysis and come up with anappropriate pricing structure.

Overview

• 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

Learning outcomes for these workshops

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

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 Variable

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