How Businesses Determine Product Pricing

The African business climate is thriving, so much show that it is now one of the world’s fastest growing economies. This is particularly true for the tech industry, as evidenced through statistics released on Forbes, which highlights that funding for tech startups in 2016 increased by 16.8% on the previous year, totalling $129million.

In 2017, African tech startups are continuing to build on this growth, with new tech companies appearing from Cairo and Cape Town, to Lagos and Dakar.

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However, all new tech startups – in fact, all new businesses regardless of industry – face one common problem: pricing their goods or services. While there are many techniques for boosting cash flow, raising capital, and building a successful startup, determining product price can be challenging.

But just how do businesses determine prices?

Understanding Costs

Firstly, businesses must understand the true cost of creating a product. This should include more than manufacturing and also account for business costs such as rent, wages and marketing. When pricing a product, it may also be a good idea to factor packaging and shipping costs with a third party company like Parcel2Go. To get a final figure, add up all of these costs and divide the sum by the number of products per unit, to give an actual production cost.

Create Revenue Targets

Almost all companies have the desire to expand, to which pricing can either help or hinder. Producing a healthy profit will boost company cash flow, helping a business to grow and flourish. Creating a revenue target figure will help to increase profits and achieve long-term goals. To create a revenue target, all production and distribution costs must be considered, along with an outlined pricing structure and an estimated selling volume.

Research Competitors

Understanding the market for a product is crucial and one key element of this is researching the competition. Business owners must determine how much competitors charge for similar products or services, as well as how much customers are willing to pay. This provides a price point from which to work, but other factors must be considered, too.

Cost-Plus Versus Value-Based

These are the two most common pricing techniques used by businesses. Cost-plus refers to adding a percentage to production costs, while value-based depends on the value a product is worth to a customer. Both are effective strategies, so businesses must research product pricing techniques to find the most suitable option.

Pricing a product too high could price a business out of the market, while too low could result in a small profit margin, eventually leading to cash flow problems and potentially, business failure. As such, utilising these techniques is essential to correctly pricing products

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