Trade Development
Authority of Pakistan
COSTING AND PRICING
Pricing Policy:
Pricing is the main element of the marketing mix. Nevertheless, you should recognize that all elements of the marketing mix are interdependent. Thus product differentiation will change costs, hence the price. Channels depend on the product and choice of a specific channel means a particular cost, affecting the price, and so on.
In export marketing you often have to accept a price for your product that is lower than the price you can get in the home market. This is why business people are often reluctant to go into exporting. They overlook the fact that exporting can be profitable even if prices sometimes do have to be lower.
To understand why we can market at a lower price and make a profit, we must examine the whole question of costing and pricing.
Your decision on what price to set for your product(s) will have to consider:
· The costs:
· The market:
· The intended profit margin.
What are your costs?
First we have to define the term "cost".
A cost is the amount of expenditure incurred on, or attributable to, a specified thing or activity. The cost of production and your marketing and delivery costs can be major cost items. There are also overhead costs.
Overhead costs, also called indirect costs, are costs that cannot be directly attributed to a product.
How much will it cost to produce?
The cost of production varies with the quantity produced. For example, 5,000 pairs of shoes cost more to produce than 500 pairs. However, the cost per pair is less. In other words, the unit cost decreases as the quantity increases. There are fixed costs to be paid no matter what quantity is produced. Examples are the factory rent, the cost of machinery, the wages of the factory manager. The more units produced the more these fixed costs can be spread, reducing the fixed cost per unit.
Besides fixed costs are the variable costs, which rise as the quantity produced rises. Examples are the cost of materials, direct labour, fuel and power, transport and agents commission.
Marketing and delivery costs : Production cost is sometime regarded as the only important cost when costing and pricing a product. However, marketing and delivery costs can be just as significant, particularly in export marketing. For example, you have to take into account the costs of holding stocks (capital and physical storage costs), packing and transport, commissions, advertising, sales trips, etc.
Break-even Price : When you have determined your total cost for producing and marketing any given quantity of product, you divide this total cost by the number of units. This unit cost is your break-even price. If you market above this price, you make a profit.
Maximizing Your Profit : We have to pay fixed costs regardless of the quantity we produce. These costs include the factory rent, the cost of basic machinery, the wages of the factory manager, and the costs of the sales office.
Getting the highest price for your maximum product or marketing the maximum number of units is not necessarily the way to earn the largest profit. The trouble with trying to increase your profit by raising your price is that higher prices usually mean fewer sales. On the other hand, marketing more units by lowering your price could simply mean lower revenue from sales. The successful marketer is one who sets the price at a level where revenue from sales exceeds total costs by the largest margin. Finding this point is what pricing policy is all about.
Evolving a Pricing Policy : Lower prices may be an effective marketing tool in the short or the long term. However, it is important to remember that this is only one way of using a cost advantage, and the advantage can easily be removed by a new entrant in the market with an even lower price. A market position secured by product quality and effective marketing is far harder to dislodge.
A decision on the right pricing policy depends on:
· Your overall analysis of the market-place.
· The prices and marketing position of competitors.
· Cost levels in your firm.
There are three main pricing policies open to a firm, namely:
* Cost-oriented pricing;
* Market-oriented pricing;
* Competition-oriented pricing.
Cost-oriented pricing or "cost plus" pricing is the simplest and most widely used policy. A computed cost is determined for each unit of production and to this base cost a percentage or absolute mark-up is added to determine price. Break-even pricing and marginal cost pricing, follow the cost-oriented pricing approach,
Demand-oriented pricing relates to the intensity of demand as expressed by consumers. A high price is set when customer interest is high and a low price when customer interest is low. Actual costs may be the same in both cases.
Competition-oriented pricing is based on the actual or anticipated behaviour of competitors. Companies using this approach do not seek a relationship between prices and costs or market demand. Instead, they fix their prices in relation to what their competitors are doing, maintaining prices at current levels if this is what the competitor is up to.
To fix your price for an export market, you should consider all three factors, i.e. cost, demand, and the competition.
1) Marginal Cost: Marginal costs or incremented cost are those where the fixed costs are considered separately e.g. a knitwear manufacturer produces 1000 T-shirts at a cost of Rs. 60/= per T-shirt covering all his fixed costs. Production of any additional quantity will cost much less as only variable costs would be incurred. So the manufactures figures that his fixed costs are covered by his home sales of T-shirts be the refer calculated only the extra costs involved (marginal cost) while prices for exports. As the marginal cost is lower for export products than the unit cost of products for home, the break-even price for exporting is lower.
2. Creative Pricing : Means taking advantage of the flexibility you have, between the lower limit of your break-even price and the upper limit of your competitors price of the similar product.
Making a quotation : When manufacturers receive an inquiry about their products, they quote the customer a price. Quoting for orders in the home market is relatively simple. Manufacturers know what their production costs are and they can quickly calculate a selling price that will give them a profit. But when they are quoting a price for an export order, they must take into account a whole set of extra costs, and they must know which of these costs the buyer will take care of, and the ones they have to cover themselves.
The export costing sheet presented in the figure on the next page will give you an idea of the type of costs SME owner must consider when making an export quotation.
Exporting Costing Sheet
Quoted to: Date:
Unit:
Gross weight: Cubic measurement:
1 . a. cost of unit
b. cost of 1 freight ton
2. Profit: % and amount
3. Agent's and/or exporters commission
4. Special labels, labelling, containers
5. Packing
6. Marking
7. Strapping or bundling
8. hauling to goods yard, wharf or other
9. Freight to wharf, route and courier
Freight to wharf per freight ton
10. Unloading charge: per
Charge per freight ton
1 1. Demurrage, cold storage,
Charge per freight ton
12. Terminal fees: Weight Measure
Amount per freight ton
13. Long-load or heavy-load charge
14. Other charges (list)
15. Consular invoices
16. Ocean freight: Weight Measure on deck
Under deck _________Ventilated Rate per freight ton
Currency __________Amount
17. Shipping agent's fee
18. Total in local currency
19. Marine insurance:
a. Value/ton (item 18)
b. + 10% of value
c. Amount to be issued
Type ________ Rate________ Premium in local currency
20. Financing charge (for credit sales)
21. CIF in local currency (add up costs for items 18, 19, 20)
22. Convert to $US or invoicing currency