The 4 Ps – Price (2/2)

This method seeks a desired return on investment capital, which is based on an economic concept. The formula is:

Target-Return Price = Total Unit Cost + [(Desired Return x Invested Capital) / Expected Unit Sales] 

A break even point in units can be computed and compared to the expected unit sales to determine how much effort is needed to reach the expected sales level to make the desired profit.

This method ignores external factors such as price elasticity and competitors’ prices because it is based on internal factors such as costs and profits.

Based on what the customer, not the company thinks about the value of a product. Organisations use advertising to communicate and enhance perceived value in buyers’ minds.

The goal is to deliver more value to a customer than the competitor and to demonstrate this value to prospective buyers.

This method purposefully charges a low price for a high quality product with cost savings realized.

The savings are passed on to value-conscious customers through programs such as everyday low pricing, high-low pricing and extreme everyday low pricing.

It focuses on meeting or beating competitors’ prices. Some companies adopt a follow-the-leader strategy, meaning changing the price when the competitor changes its price, not when the company’s demand or cost structure changes.

This method is appropriate when costs are difficult to estimate and when competition is uncertain.

This method uses the internet as the primary medium to transact between buyers and sellers. The items that are auctioned include excess inventories and used goods of all kinds.

In general, online auctions are giving greater overall satisfaction to buyers and sellers due to a large number of bidders, greater economic stakes and less visibility in pricing.

Price response analysis is the study of the effects of price decreases and increases on profits. Price response coefficients are usually collected from market research studies. Generally, price and sales volume varies inversely. This means that higher prices should result in a small number of units sold and vice versa.

For example, a price response coefficient of -2.0 means that if price falls by 5%, sales would be expected to increase by 10%. Similarly, a price response of coefficient of +1.5 means that if price falls by 6%, sales would decrease by 9%.

Break-even analysis entails the calculation and examination of the margin of safety for an entity based on the revenues collected and associated costs.

Analyzing different price levels relating to various levels of demand, an entity uses break-even analysis to determine what level of sales are needed to cover total fixed costs. A demand-side analysis would give a seller greater insight regarding selling capabilities.

Break-even price is the amount of money for which a product or service must be sold to cover the costs of manufacturing or providing it.

Break-even prices can be translated to almost any transaction.

For example, the break-even price of a house would be the sale price at which the owner could cover the home’s purchase price, interest paid on the mortgage, hazard insurance, property taxes, maintenance, improvements, closing costs and real estate sales commissions. At this price, the homeowner would not see any profit, but also would not lose any money.