PRICING AND PRODUCT
MANAGEMENT:
UNDERSTANDING COST
Group 2
BERNADINO S.K
213093936
IILONGA M.M 213098601
NEKUNDI E
200950738
SHWEDA I.M 212103423
NANGAKU V.N 213040867
NANGOLO M.N
213044528
FUKAILE M.M 212023926
INTRODUCTION
• COST: An amount that has to be paid or given up in order to get something
TERMINOLOGIES
• FIXED COST:A cost that does not change with an increase or decrease in the
amount of goods or services produced. E.g. rent, insurance
• VARIABLE COST:A corporate expense that varies with production output. E.g.
electricity, phone bill
• MARGINAL COST: The increase or decrease in the total cost of a production run for
making one additional unit of an item. That is, it is the cost of producing one more
unit of a good
• SHARED COST: Expenses that can be allocated to two or more departments or
products on the basis of shared benefits.
• AVERAGE COST: total cost divided by the number of goods produced
AC= TC/Q
• OPPORTUNITY COST : This is the next best alternative that must be sacrificed when
one has to make a choice. Every time we make a choice, there is an opportunity
cost.
OPPORTUNITY COST
• This is the next best alternative that must be sacrificed when one has to
make a choice.
• Every time we make a choice, there is an opportunity cost.
• For an example for students who are studying at the Polytechnic of Namibia
their opportunity cost is the other tertiary institution such as University of
Namibia, International University of Management
FLOOR PRICES
• PRICE FLOOR is a government- or group-imposed price control or limit on
how low a price can be charged for a product. Is basically the lowest legal
price a commodity can be sold at are used by the government to prevent
prices from being too low.
• A price floor must be higher than the equilibrium price in order to be
effective. Examlpe
PRICE AND LOSS LEADER
• PRICE LEADER: Is a powerful firm whose prices are likely to be imitated by
other firms in the same market. Price leaders usually are also the market
leaders.
• Example stutter fort
• LOSS LEADER: Is a pricing strategy where a product is sold at a price below its
market cost
• to stimulate other sales of more profitable goods or services. With this sales
promotion—marketing strategy, a "leader" is used as a related term and can
mean any popular article, i.e., one sold at a normal price
• Example of a shop that uses the pricing strategy pep
COST CONSIDERATION
• Requirements for evaluating cost structure needs a detail understanding of
the relationship between Price, Demand ,Cost & link to profit
• Break even analysis
• Contribution margin
BREAK EVEN ANALYIS
• is the point at which total cost and total revenue are equal: there is no net
loss or gain, and one has "broken even." A profit or a loss has not been
made,
• CALCULATION:
BE= FIXED COST/ CONTRIBUTION MARGIN( SELLING PRICE – VARIABLE COST)
CONTRIBUTION MARGIN
• It is the percentage of Contribution over Total Revenue, which can be calculated
from the unit contribution over unit price or total contribution over Total Revenue:
• REASONS: 1. makes it easy to calculate net income especially break even point
2. manager can easily calculate breakeven and target income sales,
3.
Make better decisions about whether to add or subtract a product line, about
how to price a product or service, and about how to structure sales commissions or
bonuses
• CALCULATION:
CM= SELLING PRICE –VARIABLE COST
COST-BASED PRICING
• A pricing method in which a fixed sum or a percentage of the total cost is
added (as income or profit) to the cost of the product to arrive at its selling
price
VALUE BASED PRICING
• Value-based 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.
• also value optimized pricing
FACTORS TO CONSIDER WHEN
SETTING PRICE
• BREAK EVEN POINT ANALYSIS: (already described in slide 8)
• TARGET PROFIT: is the expected amount of profit that the managers of a
business expect to achieve by the end of a designated accounting period
MARGINAL ANALYSIS
• Marginal Analysis: An analysis designed to determine the effect on costs and
revenue when an organization produces and sells one more unit of product.
COST MUST BE EXAMINED IN TERMS OF
• AVERAGE COST: total cost divided by volume of production
• MARGINAL COST: cost to produce and sell one more unit of output
• AVERAGE REVENUE
• MARGINAL REVENUE
APPROACHES TO PRICING
• PRICING CAN BE BASED UPON:
1.Cost
2. Demand
3. Competition
IDENTIFICATION OF INCREMENTAL
COST
• INCREMENTAL COST :These are encompassing changes that a company
experiences within its balance sheet due to one additional unit of
production( aka marginal cost). Namely:
• Incremental fixed cost e.g. Product developmental cost, advertising
• Incremental variable cost e.g.
• Incremental opportunity cost e.g. buy one more lorry instead of a truck
CUSTOMER –DRIVEN PRICING
• A method of pricing in which the seller makes a decision based on what the
customer can justify paying .
• Customer –driven pricing is not simply what the consumer is willing to pay ,
but reflects the value of the product or service from the consumers
perspective.
• Pricing decisions are at a level that convinces the customer benefits from the
transaction.
COMPETITION-DRIVEN PRICING
• A method of pricing in which the seller makes a decision based on the prices
of its competition.
• Competition-driven pricing focuses on determining a price that will achieve
the most profitable market share and does not always mean the price is the
same as the competition , it could be could be slightly lower.
PRICING FOR SERVICES
• Service business pricing is more complex than retail pricing ; however , the
price is reached the same way.
• Cost plus operating expenses plus the desired profit .
• Services are more difficult to price because costs may be harder to estimate
and the competition might not be as easy to compare.
SERVICE COST AND PRICING
• Each service has different costs
• Many small service businesses fail to analyse the costs involved in each
service and therefore fail to price their services profitably.
• They may make a profit on certain services and lose money on others , not
knowing which is which .
• By analysing the costs associated with each service you can set prices to
maximize profits and eliminate unprofitable services.
COMPONENT OF COSTS FOR
SERVICES
The cost of producing any service is composed of three parts :
• Material
• Labour
• overhead
MARKET-BASED PRICING
• The process of establishing a price for a product or service based upon
existing market conditions.
• The price is set by an agreement between a buyer and seller .
• Its often used in equity , bond and commodity exchanges.
FORMULARS
Total Cost (TC)
Total cost refers to the total cost to produce any level of output. It is the
sum of the total fixed cost and the total variable cost.
●
Total fixed cost (TFC)
A cost that does not change with the quantity produced.
●
Total variable cost (TVC)
A cost that changes with the quantity produced.
TC = TFC + TVC
or
TC = AC x Q
●
Average variable cost (AVC)
This is the variable cost per unit of output. AVC will decrease, reach a minimum and
then increase as more of a good is produced. The curve is U-shaped.
TVC
AVC = -----Q
Marginal Cost (MC)
Marginal cost is the additional cost a firm will have to pay if one additional unit of the
product is produced. The curve is also U-shaped.
ΔTC
MC = -------ΔQ
CONCLUSION
• quiz