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see also:  market entry, cost accounting , Marketing


The right way to set your prices:


There is the "right way"and the "wrong way" to set your prices.  First the wrong:  you should never start with your base cost, and add other costs, and then add distribution costs, and add retailer cost, and then add a margin, and thats how you come up with your price.  WRONG.  THis is called "cost plus" pricing because you take your base cost, and then add (plus) until you reach your final price.  This leads to price escalation, and this is NEVER the right way to handle your pricing strategy.  This is how a cost accountant would set the prices, and not the right way that a marketing professional would do so.


The right way is called "target pricing" because you start with your final "target" in mind, and work backwards to see if you are able to compete in this business or not.  It starts with the goal in mind, and considers how much the customers is able & willing to pay, before thinking about costs last.  It considers the competition, and uses pricing as a component of market entry strategy, making sure to leave enough money on the table to satisfy the channel partner and leave the customer with an adequate "value proposition" (ie functional value, or value divided by price).  



How do you do this? 


Lets assume that you are looking to enter the US market with a furniture product, a table, and you have the idea that it can sell in stores such as Bloomingdales.   So, before you do anything else, you should come to the USA, go to Bloomingdales, and see what your competitors tables are selling for.  Or, find the nicest furniture store you can find, and find a product that is as close in quality and style as your product is, and write down the price.  Now you know approximately what your "target price" is.  Then decide how you want to position your product relative to this product.  Do you want to be considered a "premium" at 5% more price (you will need to justify this premium), or do you want to gain market share with a 5% discount?  In this way, pricing is about marketing, and about strategy of the business. 


Then, with your target price in mind, you work backwards.  How much money does a typical retail store make.  What is their typical "gross margin"?   You should be able to find this data with a google search.  My analysis of the furniture industry is laid out here as an example.   You should do a similar analysis for whatever Industry you are in.


Work all the way back to the manufacturer, and find out how much the product needs to be produced for (in order to compete in this channel).  If you can not produce the product cheap enough in the location where you are located...then move (maybe to China?).  see our discussion on location consultants. 



Are you a price leader?


If you are looking to be a market leader, then it is essential that you do not cut your prices in response to competitors moves.   Leaders lead, followers follow.  Make sure you know where you fit on this continuum. 




Pricing is a special part of marketing (and of strategy):

Because prices help to not only create the image of quality and of value, but can also be used as a strategic weapon, or as a tactical tool.  You can cut prices to crush a competitor, and to drive them out of business. 
In addition, you can use prices to create a sense of value in the customers minds (see value proposition)


Two things to consider:

When looking at customers, consider both:

1. Economics-  ability to pay 
2. Psychology-  willingness to pay.

Factors that affect Pricing


the 4 C's


o   Customers  -friends
o   Channels    -friends....so take care of both of these guys
o   Competitors   (enemy)
o   Cost                 (enemy) ....be aware of your cost structure, but dont do "cost plus" pricing...see above discussion

International Pricing


Pricing in international marketing is much more tricky because you wont be able to use pricing to directly control the profits that you earn. 




1.  Currency fluctuations, interest rates, and local inflation .  As well as changing regulations, and trade barriers.    One main way to deal with the problems of currency is through the use of hedging with options.  This is a relatively simple way for a company to reduce (or eliminate) the currency risk associated with international marketing.    Another common method to deal with the currency issue is to quote all major contracts in a "stable currency", such as the USD or Euro.  This is a common practice when selling / buing goods in emerging markets where the local currency may be much more volatile. So, all major contracts are priced in dollars, for example.   To deal with the inflation issue, many international companies like to index their prices to inflation so that they know that their prices will rise along with a general rise in the price level of the country. 


2.  Localization:  The major issue for international pricing is whether or not to charge different prices to different customers in different countries?  Should you have uniform pricing for all customers?  What if you have a multi-national customer in many different markets...should you charge them one uniform price (based on average costs)?  Probably not.  More likely, you will want to keep control of local pricing and charge local customers based on their ability and willingness to pay, and you will want flexibility to adjust the price to account for price escalation in international markets, as well as different competition, and market conditions.   


3.  Transfer pricing:  Another key issue for you to consider in international pricing, is how much to charge international subsidiaries of Multinational corporations overseas.  This " transfer pricing " is one of the more heavily regulated areas of international business. 






International Pricing Strategies

o   same everywhere














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