Since it determines the level of profit that you can earn, pricing is an important element in your business strategy. Your pricing strategies can affect not only the volume of your sales but also the margins that you need to pay for your operating expenses. Of course, pricing can be simple when you are selling just a few products or service, but most of the time, many entrepreneurs find making pricing decisions complicated.
[related|post]This is especially true for those who are in the retailing business, where there could be thousands of items that need to be priced individually. In any case, however, a good pricing strategy can help you achieve your long-term financial and marketing goals. You therefore need to carefully consider all relevant factors before setting a final price for the goods or services you are selling.
METHODS IN SETTING PRICES
There are two distinct methods in setting a price. One is the cost-oriented method, where pricing is determined by adding a fixed percentage to the cost of the merchandise. The other method is the demand-oriented method, where pricing is based on what the market is willing to pay for the item.
The cost-oriented method is commonly used in retailing, where a markup is simply added to the cost of the merchandise to come up with a retail price. This markup can be expressed either as a percentage of cost or as a percentage of the retail price. Take, for example, a trader who imports shoes from China at a cost of P200 per pair and distributes it to the department stores at a selling price of P500 per pair. The markup can then be computed as P500 – P200 = P300. As a markup on cost, this can be expressed as P300/P200 = 150 percent; as a markup on retail price, it will be P300/P500 = 60 percent.