Pricing and costing in business

Business accounting

COSTING

Measuring costs is very essential in business; it can be used to plan and predict the future expenses of a company ; Costing can also be used to rate the efficiency of a company’s production process so that it is easy to detect when a business is performing below capacity. Costing is vital to accurately tracking resources consumed by a company in order to determine the unit cost of producing goods and services .
Costing lets you clearly identify the cost components ; that way when trying to reduce your cost of production (through purchasing , packaging, warehousing….) you can specifically know what needs to be addressed.

When sweeping costs together , be sure to consider overhead (administrative) costs as well as additional costs like cost of distribution . In some cases, when trying to determine product cost you have to look into operations undergone during production to fully understand and determine cost. This type of costing is called Activity Based Costing (ABC),it is based on the principle that it is not the products that a company produces that generates costs but instead the activities that are performed in planning ,procuring and producing the products.

It is important to consider the industry in which you operate when costing, click on this link to learn more about methods and techniques of cost – Methods & Techniques of Costing.

business accounting
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PRICING

Here are 5 things to consider when pricing your Product or Service


1) Cost – It is important to know the total cost  of production and delivery to consumer; this is to make sure that when you price your goods and services , you are actually covering costs and making a decent profit. When costing, be sure to include the cost of raw materials , labor , administrative costs e.t.c. These costs can in turn be used to derive the unit cost of a product, which is then considered when pricing to ensure healthy profit margins.

2) Customers – Research your target audience and customer base, take a close look at how they interact with your product/service as well as other similar products in the market. How much can or are they willing to pay for your kind of product/service. From your research , identify common traits within your target audience, trends and its relevance to their lifestyle. This can help you price right for your target audience. You can use Hubspot CRM to review your existing customer data base.

3) Competition – Be aware of how much competitors price their products so you can also price yours competitively . Look closely at the value of your products/service to consumers in relation to what your competitors offer. If you clearly offer more value (make sure you are able to justify this value to your target audience) than competition, you can price higher based on superior quality and in cases where competition offers higher value, you can price lower and make sure consumers still perceive your product/service as good quality thats affordable.

4) Value addition – If there is an added value your product/service provides ,your can make your prices reflect it. To determine the value your business adds when creating a product or service, analyze the planning, procurement and production process. Make sure you are marketing to an audience that desire and can afford this added value.

5) Tiered pricing – Consider providing consumers with options that range in value and price without compromising company (brand ) standards. This gives consumers a power of choice (which they love) to choose based on personal budgets and product features. You can approach this from a standpoint of basic good quality and increase price with increasing levels of value (good-better-best) . This can be a good way to reach a wider number of people within your target audience.

Pricing can also be used to position a product/service in the market place, you can through pricing make your product/service stand out, penetrate the market…..depending on what you intend to achieve at every point in time you can apply a Pricing strategy.

Here’s a list of Pricing strategies businesses can apply to stand out in the market place

1) Premium pricing- This involves selling at a higher price than your competitors; this is best considered when a product/service has very strong (valuable) competitive advantage. It is important to justify the high price to customers/clients by creating a value perception in form of high quality, marketing efforts, product packaging as well as other relevant ways that support the price. Companies should put together an image that lets customers/clients see that the product/service in question has value and is worth the allocated price .

2) Penetration pricing – In this case, companies set the prices at an artificially low price to attract buyers and gain market share quickly. Once the product/service penetrates the market this way and the company is able to reach its market share objectives, the price of product/service is raised. This method of pricing might not be so appropriate for small businesses as it usually results in an initial loss for the company after which the awareness gained can translate to profit.

3) Economy pricing – In this case, products and services are sold with very low margins; Companies reduce the cost of marketing , advertising and production to achieve this . This method is usually applied to gain a high market share of the mass market so the easiest way to make profit is selling volumes,it is very important to consider these conditions before going with this method of pricing.

4)  Price skimming – This involves companies charging a high price on their new products/services . They adopt this method of pricing when they have little or no competition to contend with in the market place; to enable them recover maximum returns from sales at an early stage before strong competition arises causing the company to lower prices and earn lesser margins on products /services.

5) Bundle Pricing – Bundle pricing is a good way to push out old stock, sell more and increase the value perceived by customer. With bundle pricing ,small businesses can put together multiple products and sell at a discounted price than customers would normally buy if they were purchasing the products individually . Bundle pricing is suitable for companies that sell complimentary products.

Costing and pricing should be handled right in business as it plays a major role in sustaining the business.

Business accounting

 

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