Cost-plus pricing is commonly used. The advantage is that it is simple to use and appears to meet the company’s expectation of the profit target. Works by calculating the cost of the manufacturing the product, distributed costs, research and development costs and by adding the certain percentage profit to arrive at the final price. We have to estimate the direct cost (the base value of the product X), then we have fixed costs which are the costs that almost never change and include rents, facilities, electricity, insurances, etc.
While the direct cost may change depending on the output order, if it increases more people and more resources will be necessary to provide the high number of product units. The fixed cost does not usually change so often because offices and facilities have to be paid no matter 1 or 100000 will be produced. Next, the company needs to guess how many units of the product are going to be sold and to add the certain percent mark-up profit. Disadvantages: On the one hand it is unknown how the customers will react to the price.
This is a major weakness because if they decide that the price does not represent the value of the product, the customers will not buy it. It appears that the company has for example 10 000 units of the product and no sales. If the company does not meet the pre-determined sales for the year the price of the product needs to be increased in order to cover the expenditure on the fixed cost. Finally, there is no logic at all to guess the sales that the company will make for the following year.
On the other hand if the customers decide that this price is excellent and presents a good value, the company my not have enough units of the product to satisfy the needs of the market. Mark-up pricing: It is similar to the cost-plus pricing and it is mainly used by retailers. Usually retailers buy the stock and add their own percentage profit in order to arrive on the final price in the stores. Every different product is a different case depending on the type of the product and the price set by the manufacturer.
With some products the retailers want to have profit of a 100 percent and with others near zero percent, just to keep the cash flow. Differences between the methods are only two. The first one is that the retailer has a close contact to the buyer and can develop a good ‘feeling’ about the product even if it’s overrated with some high percentage profit. The second difference is that in some cases if the stock is not sold the retailer can put a discount on it and not lose the money he invested but to sell it to the bought-in price.
That way he can save it for the next season (if the products are clothes for example) or he can just give it back to the manufacturer. This is wildly used nowadays and retailers and producers sometimes have contracts called “sale-or-return” so that unsold stock may be returned for other stock or credit. Our company intends to calculate the minimum expenditure for manufacturing high-quality watches then to add small percentage profit in order to cover up all the needing expenses and still to have income for further development.
We still need to decide how many sales we are going to make each year and try to meet them to keep up with covering the costs so that the prices will not go higher. Basically there many disadvantages but if we manage to avoid them we should be on the right path to success. A great factor in determining a products price is the existing competition. When looking in this type of method we must first define what ‘competition’ means. According to David Jobbez (Principles & Practice of Marketing, 2001) ‘When asked to name competitors, many marketing managers list companies which supply technically similar products’.
Competitors may also produce different products which satisfy the clients’ demands in the same or another way. A producer should always take into serious consideration the quality and prices which other brands offer and adjust the prices he sets correspondingly. Many producers are unaware of the prices which their competitors set. The product needs to have longer life expectancy and reliability than similar rival brands. A higher price may be set if the product offers uniqueness which is hard or impossible to find when purchasing from another place.
High cost advertising on the media (internet, television, newspapers etc. ) is often the best way of appealing to the consumer and making him/her buy your product instead that of the competition. A simple advertisement may lead to much higher profit even if the rival product is better. Another factor in determining the price is the differing competitive situation around the world. This should be taken into consideration when supplying products for the outer market.
Gordon Oliver (Marketing Today, 1995) states that: ‘International pricing is complicated by the fact that international business must conform to different competitive situations in each country. Both the countries and the competition are constraints on pricing decisions. Each company must examine the market, the competition and its own costs, objectives, local and regional regulations and laws in setting prices that are consistent with the overall marketing strategy. ‘ According to David Mercer (Marketing, 1992) ‘On the other hand, many of the more sophisticated marketers have found ways to reduce the impact of price’.
Producer may have a better control over the price of the product by using the technique of positioning and segmentation or creating the so called ‘niche’. This method is used to distant the brand from the others and the way they charge for their products is not of such great importance anymore. Jim Blythe (Essentials of Marketing, 2001) states: ‘Prices may be pitched higher than the competitors in order to give an expression of exclusivity or higher quality’. This is common in the cosmetics or car market for example. On the other hand a lower price may be set in order to take over the market quickly.
This is known as ‘penetration pricing’ and it is relatively dangerous and may lead to bankruptcy if the competition is able to also sustain lower prices. Jim Blythe (Essentials of Marketing, 2001) says: ‘It is usually safer to compete on some other aspect of the offering, such as quality and delivery’. The method of lower pricing may also be taken to extremes. This is called ‘predatory pricing’ or ‘destroyer pricing’ and it is characterized by pricing products lower than their production cost. This is done so that rival brands which are not able to participate in a vicious price war bankrupt.
The advantage here is that later on, when dangerous competitors are out of the picture, prices may be raised to begin making profit. According to Jim Blythe (Essentials of Marketing, 2001) ‘It is worth doing if the company has no other competitive edge but does have sufficient financial reserves to hold out for a long time’. This method is considered illegal in some countries. For our product the competitive-based pricing will be the following: Our main competitors are going to be luxurious brands like “Rolex” ,”Omega” , “IWC”, “Rado”, etc.
We are aiming to conquer a large share of the market. In order to have any chance we chose to offer a luxury product which offers similar qualities for less amount of money. For example our most prestigious model named “Cobalt” has the price tag of three thousand euro compared with “Rolex Daytona” which costs six thousand and five hundred euro. After establishing our company the next step is to make marketing connection and communications on international expositions and shows. There we are also trying to promote our products by high-priced commercials and advertisements.