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Price
Pricing decisions
According to a household magazine research, Remote Control is among the stuffs that are easiest to go missing. One research of Yahoo shows that up to 97.3 per cent of the people asked said that they have at least once lost their TV remote control. Based on this fact, an idea about controlling our televisions with our phone came into existence and people seem to be eager to have the products. From this we can deduce that price is not the most imperative factor that affects customers’ motivation to purchase this kind of products. Out of different types of pricing, value-based pricing suits the best. Thus we focus on value-based pricing. However, due to the fact, that the remote control plugs already exist in the market, so competitor-based pricing should also be taken into account.
Internal and external factors, affecting the price
The final price for a product may be influenced by many factors which can be categorized into two main groups:
Internal Factors:
For instance, our product pricing may depend heavily on the productivity of the manufacturing facility (e.g., how much can be produced within a certain period of time). We must know that increasing productivity can reduce the cost of producing each product and thus allow us to potentially lower the product’s price. But increasing productivity may require major changes at the manufacturing facility that will take time (not to mention be costly) and will not translate into lower price products for a considerable period of time.
External Factors:
Elasticity of Demand:
Customer Expectations: Possibly the most obvious external factors that influence price setting are the expectations of customers and channel partners. As we discussed, when it comes to making a purchase decision customers assess the overall “value” of a product much more than they assess the price. When deciding on a price we need to conduct customer research to determine what “price points” are acceptable. Thus pricing beyond these price points could discourage customers from purchasing. According to the results of the survey (how much are people willing to pay for the product). We estimate a price of 50-70€ and a cooking point of 100€.
Competitive and Other Products: There is a need for us look to market competitors for indications of how price should be set. Consumer products researching competitive pricing is relatively easy, particularly when Internet search tools are used. Price analysis can be somewhat more complicated for products sold to the business market since final price may be affected by a number of factors including if competitors allow customers to negotiate their final price.
Government Regulation: Finally, when selling beyond their home market, we must recognize that local regulations may make pricing decisions different for each market. This is particularly a concern when selling to international markets where failure to consider regulations can lead to severe penalties. Consequently we, marketers must have a clear understanding of regulations in each market they serve.
Organisational considerations
For the reason that there are already a few sellers of similar products, it is highly possible that we have Oligopolistic competition. We define oligopoly as the form of market organization in which there are few sellers of a homogeneous or differentiated product. In this case, we also feature an application together with the plug, which differs our plugs from the ones currently exist on the market; hence we have a differentiated oligopoly.
Market penetration pricing
Since there are other similar products that are already on sale on the market, utilizing market penetration pricing would be the preferred method.
Pros and Cons
There are some certain advantages over skim pricing, for examples:
Faster Growth: We offer a relatively low upfront price that attracts customers or lures them away from higher-priced competitors. The greater the demand for our product or service and the greater the price differential, the more impacting this strategy is at attracting droves of customers immediately.
Economic Advantages: Though it may be risky to assume this advantage, penetration pricing can lead to cost advantages for us if business goes the way we hope. By offering low prices and generating a high volume of sales, we can afford to buy larger quantities from suppliers. This leads to bulk discounts and lower costs per unit for us. This enables us to earn some profit even at low prices. An alternative, riskier line of thinking is to buy in bulk to get the discounts and then use penetration pricing to ensure we could sell through our inventory.
On the other hand, to succeed with penetration pricing, a company must have enough capital to stay in business until the price can be increased; the initial low prices likely do not include much or any profit for the company. And we must also be prepared to offer future discounts, such as coupons, to retain the loyalty of customers more willing to switch brands than pay higher prices.
Cost analysis
The cost analysis is divided into the calculation of fixed costs, variable costs and, finally, the calculation of the cost price.
Fixed costs
Rental costs
We rent the building, which the company uses in combination with a warehouse. This costs € 2,832.5 per month. That means that the annual rent € 2,832.5 x 12 = € 33,990 cost.
Equipment / Machinery
Our machinery costs are €12,000 per year. Using this equipment, the company can make 10,000 plugs per year.
Depreciation
According to the fact, that operating life of our assets are 3 years and costs are €12,000 per year, there is a depreciation :
€12,000 / 3 years = €4,000 → the depreciation cost of every year
App production
For the development of all the applications, that are required for the device, costs are estimated at €99.
The total fixed costs on year basis are :
Rental costs + Equipment / Machinery + Depreciation + App production =
€ 33,990 + €12,000 + €4,000 + €99 = €50,089
Variable costs
Risk costs
Taking into account the unforeseeable consequences, that may happened, we have allocated 3% of our turnover to cover it.
3 × (1 / 100) × 49,9000 = €14,970
Production costs
Including the materials and other needs, that are necessary for production of device ,we assume that production costs is €20 per one plug, consequently, €20,000 for the entire production.
Transportation costs
We are intended to distribute our products in the Netherlands by trains ( station wagon ) and trucks, transportation costs are estimated as €0,10 per plug, therefore, €1000 for 10,000 plugs.
Warranty
Considering the fact, that certain amount of products will not comply with the requirements, we assume 1% of all production are not liable to exploitation.
1% out of 10,000 plugs = 100 plugs are with damage → 100 x 49,99 = €4,999
Promotion
Budget , consisting of promotion costs, is considered to be € 25,000.
The total variable costs on year basis are :
Risk costs + Production costs + Transportation costs + Warranty + Promotion =
€14,970 + €20,000 + €1,000 + €4,999 + €25,000 = €65,969
Total budget, consisting of fixed and variable costs, is :
€50,089 + €65,969 = €116,058
Cost price calculation
Since fixed and variable costs have now been announced, cost price can be calculated, according to the formula : C = ( F + V ) : N
C = F / N + V / A
C = cost price C = ?
F = fixed costs F = €50,089
V = variable costs V = €6,60
N = normal occupancy N = 10,000
A = actual unit
C = €50,089/10,000 + €6,60 = €11,60
Selling price
Fixed cost 5,0089
Variable cost 6,60
Total production cost 11,6089
Profit margin 20,00 (52%)
Retail margin 18,38 (48%)
Maximum retail price (MRP) 49,99
The price is of a plug €49,99 per unit.
We've decided to keep 48% of the total profit for the retailer and profit margin 52% of the total profit is for the company. These profit margins are consisted of the total profit.
Break-even analysis
Why?
This analysis is a common tool used to calculate whether or not it would be financially viable to produce and sell a new product.
It is calculated with the formula :
Fixed costs (1) = Break-even volume
Price (3) – Variable costs (2)
Break-even volume in sales :
(1) Fixed costs : €50,089
(2) Variable costs : €65,969 → €65,969/10,000 = €6,60 per plug
(3) Price : €49,99
€50,089 / €49,99 - €6,60 = €50,089 / €43,39 ≈ 1154,3
It is excepted to make and sell 1154 units to break even.
Break-even volume in terms of money :
1154,3 x €49,99 = €57,7703.457
With the turnover of €57,7703.457 all costs that needs to be paid will be covered by the company.
Sources :
http://www.laukamm.de/fomweb/elearning/marketing/pricing/kotl_price_setting.htm
http://en.wikipedia.org/wiki/Market_penetration
http://www.princeton.edu/~achaney/tmve/wiki100k/docs/Oligopoly.html
http://en.wikipedia.org/wiki/Penetration_pricing
http://www.inc.com/encyclopedia/penetration-pricing.html
http://connect.lulu.com/t5/Het-Publiceerproces-Knowledge/Voorbeeld-vaststellen-verkoopprijs-Distributie/ta-p/31746