PRICING AND PRODUCT MANAGEMENT: UNDERSTANDING COST Group 2 BERNADINO S.K 213093936 IILONGA M.M 213098601 NEKUNDI E 200950738 SHWEDA I.M 212103423 NANGAKU V.N 213040867 NANGOLO M.N 213044528 FUKAILE M.M 212023926

INTRODUCTION COST: An amount that has to be paid or given up in order to get something

TERMINOLOGIES FIXED COST:A cost that does not change with an increase or decrease in the amount of goods or services produced. E.g. rent, insurance VARIABLE COST:A corporate expense that varies with production output. E.g. electricity, phone bill MARGINAL COST: The increase or decrease in the total cost of a production run for making one additional unit of an item. That is, it is the cost of producing one more unit of a good SHARED COST: Expenses that can be allocated to two or more departments or products on the basis of shared benefits. AVERAGE COST: total cost divided by the number of goods produced AC= TC/Q OPPORTUNITY COST : This is the next best alternative that must be sacrificed when one has to make a choice. Every time we make a choice, there is an opportunity cost.

OPPORTUNITY COST This is the next best alternative that must be sacrificed when one has to make a choice. Every time we make a choice, there is an opportunity cost. For an example for students who are studying at the Polytechnic of Namibia their opportunity cost is the other tertiary institution such as University of Namibia, International University of Management

FLOOR PRICES PRICE FLOOR is a government- or group-imposed price control or limit on how low a price can be charged for a product. Is basically the lowest legal price a commodity can be sold at are used by the government to prevent prices from being too low. A price floor must be higher than the equilibrium price in order to be effective. Examlpe

PRICE AND LOSS LEADER PRICE LEADER: Is a powerful firm whose prices are likely to be imitated by other firms in the same market. Price leaders usually are also the market leaders. Example stutter fort LOSS LEADER: Is a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services. With this sales promotion—marketing strategy, a "leader" is used as a related term and can mean any popular article, i.e., one sold at a normal price Example of a shop that uses the pricing strategy pep

COST CONSIDERATION Requirements for evaluating cost structure needs a detail understanding of the relationship between Price, Demand ,Cost & link to profit Break even analysis Contribution margin

BREAK EVEN ANALYIS is the point at which total cost and total revenue are equal: there is no net loss or gain, and one has "broken even." A profit or a loss has not been made, CALCULATION: BE= FIXED COST/ CONTRIBUTION MARGIN( SELLING PRICE – VARIABLE COST)

CONTRIBUTION MARGIN It is the percentage of Contribution over Total Revenue, which can be calculated from the unit contribution over unit price or total contribution over Total Revenue: REASONS: 1. makes it easy to calculate net income especially break even point 2. manager can easily calculate breakeven and target income sales, 3. Make better decisions about whether to add or subtract a product line, about how to price a product or service, and about how to structure sales commissions or bonuses CALCULATION: CM= SELLING PRICE –VARIABLE COST

COST-BASED PRICING A pricing method in which a fixed sum or a percentage of the total cost is added (as income or profit) to the cost of the product to arrive at its selling price

VALUE BASED PRICING Value-based pricing is a pricing strategy which sets prices primarily, but not exclusively, on the value, perceived or estimated, to the customer rather than on the cost of the product or historical prices. also value optimized pricing

FACTORS TO CONSIDER WHEN SETTING PRICE BREAK EVEN POINT ANALYSIS: (already described in slide 8) TARGET PROFIT: is the expected amount of profit that the managers of a business expect to achieve by the end of a designated accounting period

MARGINAL ANALYSIS Marginal Analysis: An analysis designed to determine the effect on costs and revenue when an organization produces and sells one more unit of product. COST MUST BE EXAMINED IN TERMS OF AVERAGE COST: total cost divided by volume of production MARGINAL COST: cost to produce and sell one more unit of output AVERAGE REVENUE MARGINAL REVENUE

APPROACHES TO PRICING PRICING CAN BE BASED UPON: 1.Cost 2. Demand 3. Competition

IDENTIFICATION OF INCREMENTAL COST INCREMENTAL COST :These are encompassing changes that a company experiences within its balance sheet due to one additional unit of production( aka marginal cost). Namely: Incremental fixed cost e.g. Product developmental cost, advertising Incremental variable cost e.g. Incremental opportunity cost e.g. buy one more lorry instead of a truck

CUSTOMER –DRIVEN PRICING A method of pricing in which the seller makes a decision based on what the customer can justify paying . Customer –driven pricing is not simply what the consumer is willing to pay , but reflects the value of the product or service from the consumers perspective. Pricing decisions are at a level that convinces the customer benefits from the transaction.

Competition-driven pricing A method of pricing in which the seller makes a decision based on the prices of its competition. Competition-driven pricing focuses on determining a price that will achieve the most profitable market share and does not always mean the price is the same as the competition , it could be could be slightly lower.

Pricing for services Service business pricing is more complex than retail pricing ; however , the price is reached the same way. Cost plus operating expenses plus the desired profit . Services are more difficult to price because costs may be harder to estimate and the competition might not be as easy to compare.

Service cost and pricing Each service has different costs Many small service businesses fail to analyse the costs involved in each service and therefore fail to price their services profitably. They may make a profit on certain services and lose money on others , not knowing which is which . By analysing the costs associated with each service you can set prices to maximize profits and eliminate unprofitable services.

Component of costs for services The cost of producing any service is composed of three parts : Material Labour overhead

Market-based pricing The process of establishing a price for a product or service based upon existing market conditions. The price is set by an agreement between a buyer and seller . Its often used in equity , bond and commodity exchanges.

Formulars Total Cost (TC)   Total cost refers to the total cost to produce any level of output. It is the sum of the total fixed cost and the total variable cost. ● Total fixed cost (TFC) A cost that does not change with the quantity produced. ● Total variable cost (TVC) A cost that changes with the quantity produced. TC = TFC + TVC or TC = AC x Q

Marginal Cost (MC) ● Average variable cost (AVC) This is the variable cost per unit of output. AVC will decrease, reach a minimum and then increase as more of a good is produced. The curve is U-shaped.   TVC AVC = ------ Q Marginal Cost (MC) Marginal cost is the additional cost a firm will have to pay if one additional unit of the product is produced. The curve is also U-shaped. ΔTC MC = -------- ΔQ

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