Cost Based Pricing

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Do curso por IE Business School

Pricing Strategy

432 ratings

IE Business School

Pricing Strategy

432 ratings

Curso 2 de 5 em Specialization Marketing Mix Implementation

Pricing is one of the most important but least understood marketing decisions. Learn and practice concepts, techniques, and get to grips with the latest thinking on assessing and formulating pricing strategies. Analyze how firms attempt to capture value, as well as profits, in the revenues they earn. After this course, you will be able to contribute to the process of formulating pricing strategies for your own products and services, or those of your firm. This course has an additional focus on pricing dynamics and the reaction to and by competitors, taking a highly pragmatic approach and one that is directly applicable to your day-to-day professional life. Martin Boehm - IE Professor and Dean of the Business School with over 10 years experience - will guide you through four modules. We begin with the importance of pricing and how it ultimately can affect the bottom line. Then, we move on to methods to help you decide what is the optimal price for your product; and then price discrimination - should all your products follow the same pricing strategy or should you differentiate depending on the customer segment? Finally, we look at pricing psychology and how you can manipulate customers in order to drive the highest possible price for your product.

Na lição

Demand Curve and Pricing

In this module we will start with the importance of pricing, especially for the bottom line. Having this in mind, and after showing how pricing is the most important driver of profitability, when you finish this module you will be able to execute cost, competition and customer-based pricing. You will also be able to use the concepts of price elasticity and optimal price while setting prices for your products and services.

Pricing Approaches2:47

Cost Based Pricing4:21

Cost Based Pricing Printer Example4:09

Competition Based Pricing3:01

Customer Based Pricing5:03

Conheça os instrutores

Martin Boehm
Professor of Marketing
Dean of IE Business School

[MUSIC]

Cost based pricing is historically the most common pricing procedure.

Because it carries an aura of financial prudence.

According to this view, financial prudence is achieved by

adding a markup to the cost of a product to arrive at the sales price.

In theory, this is a simple guide to profitability.

Let's illustrate this using a very simple example.

Imagine that your company has been developing a new printer

that will streamline many processes for your small business customers.

Your job is to determine the price of the printer.

After doing some research, you determine that the best method for

pricing the printer is the cost-based pricing method.

When considering all the expenses like supplies, production costs, and

marketing expenses, you determine that each printer will cost $78 to produce.

If you sold the printer at $78, your company would break even.

Meaning you would not lose any money, but you also would not generate any profits.

However your company definitely plans to

make some money from the sale of the printers.

In fact, the goal is to earn a margin of 25% on each printer.

Adding this 25% margin on top of your cost of the printer

of $78 results in a final sales price of $97.50.

This allows the company to recoup the cost of producing the printer,

while earning a 25% profit margin on each unit sold.

Looks straightforward, right?

However, there's a fundamental issue with cost based pricing.

In most industries,

it is impossible to determine a product's unit cost before determining the price.

Now you're going to ask yourself, why?

Because unit costs typically change with the volume being produced.

This cost change occurs because a significant portion of costs are typically

fixed and must somehow be allocated to determine the unit cost.

Unfortunately, because these allocations depend on volume,

which changes with changes in price, unit cost is somehow a moving target.

Let's again illustrate this using our printer example.

Now with some more details regarding the cost structure.

Let's assume more specifically that the supplies, or we could call them as well

the raw materials of producing the weight printer are $28.

The cost of production, and the cost of marketing, is a total of $5 million.

Remember before we said, that the cost per printer is $78.00.

In order to arrive at that number, we also assumed that we're going to sell

a total of 100,000 units or 100,000 printers.

How would now the cost per printer and hence the price

per printer change if we were to sell only 50,000 units.

The resulting price would now jump to $128 or

said definitely, an increase in price by more than 30%.

So we have seen, the problem with the cost-based pricing approach is

that it mistakenly assumes that customers base their willingness to pay for

a product on how much it costs to produce it.

Costs however, have very little to do with charging $19.95 for a pet rock.

Instead, customers choose the price

they are willing to pay based on the value that they receive from a product.

Let me finish this module with an old proverb that actually says,

cost is a matter of fact, price is a matter of policy.

[MUSIC]

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