Determining pricing by watching objectives and factors affecting
Determining product or service pricing can be very tricky especially in an unstable economy like Nigeria. It is a constant battle between trying to be profitable, competitive and affordable to customers. Pricing of your products/services should be determined by certain factors and those only. These factors can be internal or external. Firstly, one must consider its business needs and more specifically, objectives.
The aim of every business, small, medium and large is to make profit. Profit from pricing doesn’t necessarily mean profitability in the long run because there are other factors that may affect the overall business profitability.
There are a number of business objectives particular to different businesses. Pricing is not always plug and play and shouldn’t be a ‘one size fit all’ approach solely because business objectives may vary from one business to another.
As an SME, one major objective should be to have a positive Cash Flow at all times as opposed to Returns on Investment. This is the budding stage of a business and focus should be placed on stabilizing the business even in lean months and furthermore for expansion purposes.
Some of the internal factors to consider while determining pricing are: Direct Costs, Fixed Costs and Depreciation.
Determine the Direct Cost which is also known as cost of production. This has to include even the tiniest detail and factor it in your pricing. For example, cost of transportation used in purchasing the gas used for cooking and also the gas itself should be documented as a direct cost of production and factored in your pricing.
Determine the Fixed Cost which is also known as Overhead and factor it in your pricing. It is important to incorporate all fixed costs in your pricing including rent, directors’ salaries and even routine renovations. Fixed costs shouldn’t be paid from business profits.
Depreciation is one of the most overlooked factors in pricing. Productivity will always lead to depreciation of equipment and eventually replacement. This needs to be factored in pricing as it will enable a business save for the cost of purchasing a new equipment.
A business must estimate its demand for its products and services. This will enable having a forecast of Revenue to calculate the Breakeven point. This is to know what your business needs to sell, and at what pricing, to be able to pay for direct and fixed costs.
Some External factors to consider in pricing are: Economy, Government Policies and Competition.
Market trends of an economy must be studied and factored in your pricing. Assuming all other factors are stable, when price is reduced, demand increases and vice versa. Also, when supply increases, price reduces and vice versa. Your pricing must be structured around the point demand and supply both meet at all times. This is known as the equilibrium point on the demand and supply curve in economics.
In Nigeria, most raw materials are imported with the use of foreign currencies. Watch the Foreign Exchange trends fiercely and factor in pricing at all times. I remember when the Dollar kept going up against the Naira in 2017. In my business, we had purchased some items in bulk and sold for our somewhat good pricing. When it was time for a new purchase, everything was almost double the price! If we had watched the forex trend closely, we would have realized sooner to recalculate our pricing to ensure we could keep up with purchases. Also look out for inflation.
Endeavour to study Government’s Policies on businesses and be sure to factor in your pricing. For example, Value Added Tax (VAT) is levied on some products, services by the Nigerian government for the consumers. This should be factored into your pricing as to avoid paying the VAT from your business profits.
Study your competitor’s pricing structure. Be sure not to be underpriced or overpriced to competitors when you are giving relatively, the same value. To be underpriced may give off as selling inferior products/services and to be overpriced will put buyers off.
One common question entrepreneurs may ask is how to have very good pricing in the midst of competition and stay profitable. Competitors pricing should be factored but do not make your pricing based on your competitors’. They may have other factors that affect their pricing and may lead to overall business profitability for them.
The trick is to drive down Direct and Fixed costs to the barest minimum at all times. While it is paramount to factor both in your pricing, ensure you keep them down to reduce the effect on your pricing. Direct and Fixed Costs in small businesses must also be kept down to ensure growth, profitability and furthermore sustainability.
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