Cost and price analysis are explored to help you determine the right proposed price for your products and services.
The strategic importance of price demonstrates how the product, distribution, price, and promotion strategies must fit together into an integrated marketing strategy and product positioning. Analyzing the pricing situation is necessary to develop a price strategy. This includes for a mix or product line, or select a price strategy for a new product or brand.
Price strategies are classified according to the company’s price relative to the competition. How active promotion of price will be in the marketing program. Price policies and structures must also be determined for new products as well.
Analyzing the Pricing Situation
Pricing analysis is important in:
- Evaluating new product ideas
- In test marketing
- In selecting an introduction strategy
- Positioning strategy
The price analysis is necessary for existing products. Due to changes in the target market and competitive environment. Also the unsatisfactory performance of products, and modifications in marketing strategy over the product’s lifecycle.
Analyzing the pricing situation includes:
- Establishing the product markets responsiveness to price
- Determining product cost
- Analyzing competition
- Assessing legal and ethical constraints
I will explore how performing a price analysis and cost analyses will get your pricing right for bids or proposals.
Product Market Responsiveness to Price
One of the challenges of pricing in a new industry is estimating how buyers will respond to alternative prices. The pricing of software for personal computers illustrates the situation buyers have difficulty evaluating the applicability and cost benefits of these products.
A SaaS software manufacturer offered a new program at $299 and supported it with an aggressive advertising campaign. Experimenting with alternative prices and no advertising, marketing management eventually selected a price of $99 after encountering buyer resistance above $100. Since software is sold on the basis of features and performance. Buyers did not consider the program competitive with alternatives in the target market.
Product market analysis with respect of price should answer to the following questions:
- How large is the buying potential of the product market?
- What segments exist in the product market and what the market target strategy is to be used?
- How sensitive is demand in the segments of interest to changes in price?
- How important are non-price factors, such as features and performance?
- What are the sales forecast at different price levels?
Price elasticity is the percentage change in the quantity demanded when price changes, divided by the percentage change in price. Elasticity is measured for changes in price from some specific price level and is not necessarily constant over the range of prices under consideration.
Research indicates that people will buy more of certain products at higher prices. That’s establishing a price-quantity relationship that slopes upward to the right. People seem to be using price as a measure of quality because they are unable to evaluate the product.
Estimating the exact shape of the demand curve is probably impossible in most instances. However, there are ways to estimate the sensitivity of sales to alternative prices.
Test marketing can be used for this purpose. Analysis of historical price and quantity data may be helpful. And user research studies, such as consumer evaluations of price, are also used.
These approaches coupled with management experience, determine the sensitivity of sales to price in a range of prices under consideration.
Various factors in addition to price may be important in analyzing buying situations. Buyers may be willing to pay a premium price to gain other advantages. Or instead be willing to forgo certain advantages for lower prices.
The price of a product facing competition can be separated into two components:
- The commodity price that fluctuates with the ebbs and flows of supply and demand
- The premium price differential that one or more companies may achieve due to customers perceived values
Certain purchasing situations may reduce the importance of price in the buyer’s selection process. The price of the product may be a minor factor. When the amount is relatively small compared to the importance of the use case.
Examples include infrequently purchased electronic parts for home entertainment equipment, batteries for appliances, and health and beauty products during a vacation. The need for important but inexpensive parts for industrial equipment is another situation that reduces the role of price in the buyers purchasing decision.
Forecast of sales is needed for a range of prices that management is considering. These forecasts, when combined with cost estimates, enable management to examine the financial impact of different price strategies. The goal is to estimate sales in units for each product at the price is under consideration.
Assuming all other marketing program influence remain constant, elasticity estimates can be used to develop sales projections. These methods of forecasting are shown in Exhibit 1.
The parity price (Step 1) corresponds to an index value of 100. This indicates that the company’s price is equal to the average for the product category in which it competes. Then in steps 2 and 3, the effects of price changes are estimated. Using these relative measures of elasticity, the forecast can be made from test market data, or historical sales data in the case of existing products.
There are many forecasting situations when all other marketing program influences are not constant. The effects of other factors must be included in the analysis. Control tester are used for this purpose. For example, in a fast food chain can evaluate the effects of different prices in a sample of the stores. Experimental design measure or control the effects of factors other than price.
Product costs provide essential information for pricing decisions. A guide to cost analysis is shown in Exhibit 2.
First, analyze the structure of the direct and indirect costs of producing and distributing the product. This involves determining fixed and variable components of cost. Also, find the portion of product costs accounted for by purchases from suppliers.
A large portion of the cost of autonomous vehicles is made up of components produced by suppliers. It is useful to separate cause components into labor, materials, and capital categories and studying cost structure. If you work for a larger company you can often employ the cost account to help you with these figures.
Stage B of cost analysis examines the cost elements and volume relationships.
- How did cost vary at different levels of production or quantities purchased?
- Can economies of scale be gained over volume range, given the target market and intended program positioning strategy?
- At what volumes are significant cost reductions possible?
The main task of the analysis is to determine the volume produced or distributed should be taken into account in selecting a price strategy.
Stage C analyzes competitive advantage. Comparing key competitors cost is valuable. Are they higher, lower, or about the same? Although this information is sometimes difficult, experienced marketing managers often make accurate estimates.
The important consideration is placing key competitors into relative product categories. You can estimate competitive cost information from a knowledge of wage rate, material cost, production plants, and related information.
Stage D of the cost analysis considers the effect of experience on cost. Experience or learning curve analysis indicates the cost and prices for some product decline by a given amount each time the number of units produced doubles. Price declines sometimes uneven due to competitive factors.
The experience curve effect should be examined on an industry and company basis and see if active not the same across all product categories. There are several issues to be evaluated. This includes your experience curve estimation, including the effect of aggregation of product data, errors and variables, the functional form of the relationship, and measurement.
The experience curve can be estimated. Start by using the total direct cost required to produce the first unit and the Improvement rate due to experience.
Cumulative total direct cost at any point will be equal to the cost of the first unit times the number of units raised to the power equal to 1 minus the improvement rate. The improvement rate ranges between 0 and 1, and the equation for cumulative cost is:
Finally, in stage E, marketing management should determine how much influence the firm may have over cost in the future.
To what extent can research and development, bargaining power with suppliers, in process innovation, and other factors reduce costs over the planning horizon?
These considerations are interrelated with experience curve analysis, they may operate over a shorter time range. The bargaining power of an organization and its channels of distribution. For example, can have a major effect on costs, and the effects can be immediate.
Underlying strategy formulation is several important strategic activities. This includes analysis of the product market and cost considerations. This analysis indicates the extent of price flexibility.
Be sure to do your research and price analysis. This will help you position your product or service and your target market appropriately. Get it right in your sales will grow.
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