Pricing Policies
Business Plan
As a small business owner it is essential to your success that your pricing policies take in to account your business idea, competition, location of your business, cost and availability of supplies. You need to find the right price for your target market. For this purpose we will introduce you to:
- Types of Pricing Policies
- Types of Pricing Techniques
- Types of New Product Introduction
Types of Pricing Policies
Cost Oriented Pricing – businesses calculate the costs of acquiring or making a product, their expenses of doing business, and then add their projected/desired profit to arrive at a price. There are two ways of doing this:
- Markup Pricing – is the difference between the price of an item and its cost. Generally used by retailers who acquire goods for resale.
- cost (c) + markup (m) = retail price (rp)
- example – shirt ($10) + markup (50%) = rp ($20)
- Cost Plus Pricing – Costs and expenses are calculated and then the desired profit is added. Generally used by service businesses (graphic arts, ISP's, contractors, etc)
- Expenses (parts and/or materials) + labor + profit = price
- example – building supplies ($700) + labor ($30hr x 5) + profit (10%) = price ($935)
Competition Oriented Pricing – when businesses study their competitors to determine their prices.
- Going Rate Pricing – aligning prices with competitors
Types of Pricing Techniques
- Psychological Pricing – creating the illusion that your customers are getting a great value.
- Odd–Even Pricing – setting prices that end in either all odd or all even numbers
- Prestige Pricing – setting higher than average pricing to suggest status
- Promotional Pricing – items are reduced for a short period of time
- Price Lining – all merchandise in a given category is set at a certain price (i.e. - all blouses $25)
New Product Introduction
Skimming Pricing – setting a very high price on a new product to capitalize on the initial high demand.
- A good example of skim pricing is when a new cell phone product comes out that has a feature that others don't. This happens in all kinds of markets, the innovation makes the demand high, and the higher the demand, then the higher the manufacturers can charge people.
Penetration Pricing – the initial price for a product is set very low.
- The price charged for products and services is set artificially low in order to gain market share. Once this is achieved, the price is increased.
Supplemental Material
Read the following short article Pricing Strategies from NetMBA and pay particular attention to Pricing Objectives
Writing the Pricing Policies
Introduction
- Write a short introduction to pricing that explains why it is important for businesses to price their products correctly (what results from incorrect pricing - too low or too high?)
- Follow this with a description of how you have looked at different pricing options and how you feel the ones you've identified will be of greatest benefit to your company.
Body
- Write a topic sentence describing how you have looked at different pricing options and feel the following (from below) will be of greatest benefit to your company
- Using bullet points, write 2-3 sentences explaining each of the following:
- the Pricing Policy you will be using and why.
- the Pricing Technique you will be using and why.
- your strategy for New Product Introduction.
Conclusion
- Conclude the section by emphasizing the importance of implementing effective pricing strategies, policies and techniques.
Pricing Tips – think in terms of how these policies will:
- get the product or service accepted by the community
- help maintain (and hopefully increase) your market share in the face of competition
- produce profits
Pricing Policy Example (Rylee Jakabosky)
Save as > "pricing-policies" in your Business Plan folder
Upload via the Synergy Dropbox
