1000 Business Lessons Every Businessman Must Know

Chapter 22: Price Decision: Plays an Important Role in Business Success (1)
[-]. Price analysis
171. Basic elements of price composition

No matter what strategy an enterprise adopts to set prices, from a long-term and overall perspective, its commodity prices must recover costs and obtain reasonable profits.Although the links of commodities in the market are different, and the elements that make up the price are also different, but all commodity prices are composed of four basic elements, which constitute the economic content of the price.The four basic elements are: production costs, distribution costs, taxes and profits.

1. One of the price components: production cost

Specifically include: material costs; costs of labor means consumption; wage costs; other costs, that is, the costs of material consumption and labor consumption in the process of enterprise organization and management, such as management costs, etc.

2. The second element of price components: circulation costs

Specifically, it refers to the various expenses incurred by commodity operators engaged in commodity purchase, transportation, storage, sales and other activities.The circulation expenses incurred by industrial enterprises before selling commodities to commercial enterprises have been included in the production cost and become a component of the price of industrial enterprises. The circulation expenses referred to here are the circulation expenses incurred by commercial enterprises, which are a component of commercial prices.

3. The third element of price components: taxes

There are different classifications of taxes from different perspectives. From the perspective of the relationship between taxes and prices, taxes are divided into two categories: tax outside the price and tax inside the price.

Taxes included in the price refer to taxes included in the price.

4. The fourth component of price: profit

The profit in the price is the difference between the selling price of the commodity and the cost of production, distribution costs and taxes.Profit is an important economic indicator that reflects the results of production and operation activities, and it is also the source of enterprise development.

172. Market demand conditions affect prices

In general, the cost of a commodity affects the price of the commodity, and the price of the commodity affects the demand for the commodity.

The principle of economics tells us that if its factors remain unchanged, the change in consumer demand for a commodity is in the opposite direction to the change in the price of the commodity. If the price of the commodity falls, the demand will rise, and when the price of the commodity rises , the demand will decrease accordingly, which is the so-called law of demand.

The law of demand reflects the general relationship between changes in commodity demand and commodity prices, and is an important factor that companies must consider when deciding their own market behavior, especially when setting prices.The so-called "small profits but quick turnover" of enterprises has practiced this truth.Another example is that when the demand for a certain product in the market increases in a certain period of time, more profits can be obtained by raising the price appropriately, and on the contrary, it is appropriate to take measures to reduce the price.When an enterprise sets commodity prices, the market demand is often the main reference factor.

173. Market competition affects prices
In a perfectly competitive market, since there are many companies engaged in the buying and selling of commodities in the market, the quantity of each company’s sales is not much different, and it only accounts for a part of the total market commodities. The commodities they buy and sell are the same, and new companies can Entering the market at any time, information is completely free to flow, and production factors can also be freely allocated. In such a situation, the enterprise can only be the receiver of the price, not the price decider. The price is completely determined by the relationship between supply and demand. There is no need to conduct market analysis and marketing research, and it is impossible to negotiate pricing.

The assumption of a perfectly competitive market is difficult to find in reality. There are mainly several types of markets that are common in reality, such as complete monopoly, monopolistic competition, and oligopolistic competition.Under complete monopoly, a certain product or service is completely monopolized by one enterprise.In reality, some public utilities, or some important industries, have such characteristics under the support of the government.Completely monopolized enterprises are fully capable of setting prices freely. They can formulate profit-maximizing prices according to the consumer demand function and obtain monopoly profits.

A monopolistic competition market is a market between perfect competition and complete monopoly, which is a common situation that contains both monopoly tendencies and competitive elements.Different from perfect competition, the products of many sellers in the imperfect competition market are different in quality, appearance, color, style, packaging, and brand, and even for the same product, companies can make product differences through different channels. change.Such market conditions give companies certain pricing power, and consumers are willing to accept high prices if the difference is indeed valuable.

The oligopoly market is also a kind of imperfect competition, which means that the products produced and sold by several enterprises in an industry account for the vast majority of the sales volume in this market, and the prices are actually jointly controlled by them.

In addition, the role of the government on the market is very large in some countries, which will also affect the pricing behavior of enterprises.

174. The characteristics of commodities and the strength of enterprises affect pricing

1. Characteristics of the product

The attributes or characteristics of commodities are also one of the factors that companies should consider when pricing.In the minds of consumers, different commodities have different characteristics of meeting needs, such as daily necessities, status characteristics or functional commodities, and different types have different effects on prices.For example, when purchasing functional goods, consumers mainly consider whether the practical value and function of the goods are consistent with the price, while for status products, consumers generally pay less attention to the adaptation of price and utility, and pay more attention to their status and prestige. show.In addition, the perishability, perishability and seasonality of the commodity, as well as the fashion of the commodity, the product life cycle and other characteristics will have a certain impact on the price of the commodity.

2. The strength of the enterprise

The production and operation capacity of the enterprise and the management level of the enterprise will also have a certain impact on the price setting.Enterprises with relatively strong scale and strength have advantages in terms of price. Due to the economies of scale of enterprises, the general labor productivity is higher and the unit cost is lower, which allows enterprises to have more leeway in pricing.If the sales channels are unblocked and the degree of control is high, then the price determination ability of the enterprise will be relatively large, the information communication will be smooth, and the price can be adjusted relatively easily by maintaining a good relationship with consumers.

[-]. Pricing principles
175. Take the goal as the principle
When setting prices, the company must understand the above-mentioned influencing factors, such as market conditions, etc., but these are background factors. Targeted.

There are generally five goals behind the company's price determination:

One is survival, which is the most basic goal of the enterprise, but it may be the most urgent need of the enterprise in some occasions, such as excess productivity, fierce competition or product decline;
The second is to seek the maximum current profit, which is the most important assumption in economics. In reality, relatively few companies will consider this goal;

The third is to pursue the highest current income. Some enterprises may regard the maximization of sales revenue as their highest goal, thinking that the highest sales revenue will lead to the maximization of profits and the growth of market share;

The fourth is the highest sales growth. Enterprises pursue the highest growth in sales. Such enterprises often pursue long-term profits. Therefore, they often adopt penetration pricing strategies to set prices at a low level, hoping to win a high market share;

Fifth, product quality is leading. In order to establish a leading position in product quality in the market, the price should also match its goal. For example, some companies have adopted a high-quality/high-price strategy and achieved success.

176. Customer-oriented principle
In the final analysis, the price must be acceptable to customers.An increase or decrease in price will elicit a response from customers.Customers' reactions are based on their understanding of price changes, and different customers may interpret the firm's price behavior differently.

For example, for a company's price reduction, customers may think that this product will be replaced by a newer product, or that the company may be in trouble, or the quality of this product may have declined; Various understandings: This product is more popular, the quality of this product has improved, and the business owner is very greedy, ready to obtain excess profits.

It is very important for a company to grasp the customer principle when pricing, because wishful pricing cannot be understood by customers, and customers may have a contrary understanding of the company's pricing behavior, thus affecting the effectiveness of the company's pricing.

177. Taking competition as the principle
Enterprises must consider the response of competitors when setting prices. After all, there are only a small number of manufacturers in a complete monopoly position. Most companies will always encounter various competitions in the market. It is temporary. The troubles encountered by Microsoft also show that monopoly cannot last long. After all, the market still advocates competition, which requires enterprises to grasp the principles of competition when pricing.

Mastering the principles of competition requires a firm to anticipate how its competitors will react to its own pricing.This requires companies to investigate competitors' financial status, recent sales and production capabilities, loyal customers, and company goals.Moreover, competitors and customers may also give different interpretations to the company's pricing, so the impact of the company's pricing on competitors is also quite complicated, which requires companies to conduct certain decision-making analysis.

[-]. Pricing procedure
178. The first step: determine the pricing target
The establishment of enterprise price is a planned and step-by-step activity, and it is a specific work to realize the enterprise's marketing goals and overall strategy.Therefore, the pricing target of the enterprise must be clearly defined first.There are a variety of pricing goals for a business:

One is the return on investment target.Enterprise pricing should aim to achieve its expected rate of return.

The second is the market share target.Take maintaining and improving the market share (or market share) of the enterprise as the pricing goal for a certain period of time.

The third is the goal of price stability to avoid the occurrence of price wars.

The fourth is to prevent competition goals. Enterprises with superior conditions set prices to prevent competitors from entering.

The fifth is the goal of maximizing profits, aiming at maximizing the long-term total profits of the enterprise.

The sixth is the goal of getting through difficulties, or the goal of maintaining survival.

The seventh is the goal of social image, with the goal of shaping a certain market image.

179. Step Two: Estimating Market Demand

Commodity prices and market demand are generally inversely proportional to each other.Price affects demand, and under normal circumstances, market demand moves in the opposite direction to price.As the price increases, market demand decreases.The price of an enterprise's goods will affect the demand, and changes in demand will affect the sales of the enterprise's products and the realization of the enterprise's marketing goals.Therefore, estimating market demand is an important task in setting prices.

To estimate demand, we must first estimate the price elasticity of demand and understand the response of market demand to price changes.

The price elasticity of demand can be expressed by the formula:
Price elasticity of demand = % change in demand / % change in price

Variations in the elasticity of demand for commodities have different effects on pricing.Pay attention to the following aspects.

1. The demand elasticity of different products is different, and the pricing of enterprises should be different
When the commodity is full of elastic demand, if the price of the commodity falls slightly, the sales volume will increase significantly, and the total income of the enterprise will also increase; on the contrary, if the price is raised slightly, the sales volume will decrease obviously, and the total income of the enterprise will also decrease. .The direction of price changes is inversely proportional to the direction of changes in total income.For such commodities, it is beneficial for enterprises to sell at low prices.

When the commodity has a general elasticity of demand, the range of price change is the same as the range of sales volume change, and the direction is opposite, and the total income remains unchanged.For such commodities, enterprises should not use price means to compete.

In the case of lack of demand elasticity for commodities, the price of commodities falls a lot, the sales volume increases only slightly, and the total income of the enterprise decreases; on the contrary, the price increases a lot, and the sales volume only decreases slightly.Prices move in the same direction as total income.Adopting low prices for such commodities cannot achieve the purpose of increasing sales volume and improving efficiency, while limited and higher pricing is beneficial to enterprises.

2. The demand elasticity of the same product is different in different periods or in different price segments, and the pricing of enterprises is also different
The price elasticity of demand must also be estimated in different sales periods and in different price segments.The elasticity of many commodities is not consistent. For example, if the unit price of a certain commodity is in the price range of 30~50 yuan, the demand elasticity is >1, but in the range of 15~30 yuan, the demand elasticity is <1. The enterprise needs to measure the demand of each section in detail. Flexibility to determine the right approach and identify ideal pricing points.

3. Different consumers have different demand elasticities for the same product
Sometimes consumers with different demand intensities have different demand elasticities for the same product, so we must carefully distinguish them and formulate different methods.This is the basis of differential pricing theory.

180. Step Three: Estimating Costs
When an enterprise sets commodity prices, it needs to carry out cost estimation, which is no exception for any enterprise.The upper limit of the commodity price of the enterprise depends on the market demand and related restrictive factors, and the lowest price cannot be lower than the operating cost of the commodity. Exceptions for expenses), below this limit, the enterprise cannot maintain reproduction and continue to operate.Therefore, to formulate prices, it is necessary to estimate the cost of the product under the condition that the enterprise's goal has been determined and the market demand has been figured out.

The cost of an enterprise includes two types: one is fixed cost, which refers to the cost that does not change with the change of the output of the enterprise in a certain period of time.For example, depreciation expenses of fixed assets, product design fees, rent, interest, management expenses, etc.It cannot be included in a certain product at a certain stage, but is included in various products in a variety of ways.

The other is variable cost, or variable cost, direct cost, which refers to the cost that changes with the product output and sales revenue of the enterprise, such as raw materials, auxiliary materials, and fuel for production.This part of the cost changes in direct proportion with the change of product output, and it can be directly included in various specific products.

The sum of fixed costs and variable costs is the total cost of a product.When the enterprise does not start production, the output is zero, the variable cost is equal to zero, and the total cost is equal to the fixed cost.

181. Step Four: Analyze the Competitive Situation
In addition to depending on demand conditions and cost conditions, the establishment of enterprise prices is also strongly affected by market competition conditions.The analysis of the competitive situation includes three aspects.

(End of this chapter)