PRICING
The Pricing Conundrum:
Understanding Pricing
Strategy Dynamics For
SME’S
By Geoffrey Sirumba
T
oday’s operating environment is
becoming complex and tougher
more so for the SMEs. There
are many problems that are encountered
by entrepreneurs throughout the course
of managing their business. However,
pricing strategy remains one of the most
challenging concepts bedeviling the
SMEs today. Pricing is the only avenue in
the marketing mix that is of paramount
importance to a business; it is the only
source of revenue. In this regard, proper
crafting of pricing strategies is important
to avoid revenue leakages and maximize
returns.
So, how much should you charge for that
product or service?
Before embarking and settling on a
particular price, it is advisable that you
conduct pricing strategy analysis. It need
not be complex but just a simple process
that uncovers all the scenarios. However,
the two most critical questions whose
answers can help you set proper pricing
for your business are: how much should
I charge to attain my targeted profit?
And are the customers willing and able
to pay the suggested price? Even so, price
determination is mostly denominated by
two perspectives that have been adopted
by many businesses across the world.
Economic and Cost-Based
Pricing
Economic pricing provides an overall
viewpoint where the amount demanded
and the amount supplied is in equilibrium
while cost-based pricing, on the other
When doing the pricing, it is important
to significantly consider the environment
and look at the life stage of the product,
whether it’s new in the market or has
been in existence for a while. To do this
you need to conduct product life cycle
analysis so that you can come up with
pricing that is flexible enough to match
the varying marketplace characteristics
at different life cycle stages.
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hand, is price determination approach
that involves totaling all costs associated
with offering an item in the market then
adding an amount to cover profit and
expenses not previously considered.
Most businesses use cost-based pricing as
it’s easy to rationalize and quite predictable.
However, there are two approaches to
cost-based pricing; mark-up pricing and
profit margin. Mark-up pricing is based
on the cost of the item and profit margin
is based on the sales price.
Markup pricing is easy to apply, and
it is used by many businesses (mostly
retailers and wholesalers). However, it
has two major flaws. One is the difficulty
in determining an effective markup
percentage to apply. If this percentage is
too high, the product may be overpriced
for its market; then too few units may be
sold to return the total cost of producing
and marketing the product.
On the other hand, if the markup
percentage is too low, the seller is “giving
away” profit that it could have earned
simply by assigning a higher price. In
other words, the markup percentage needs
to be set to account for the workings of
the market, and that is very difficult to
do. To remedy this challenge, breakeven
analysis tool can be used to determine the
minimum sales volume needed at a certain
price level to cover all costs.
The other challenge with markup pricing
is that it separates pricing from other
business functions. The product is priced
after production quantities are decided