Discuss two main approaches to pricing for new products and give examples to illustrate how each pricing strategy works?
UCL Graduate and Fully qualified accounting and economics teacher
Two pricing strategies include mark up and margin. Both of these methods start from the products cost to determine a selling price. Now before you read below, you should know that Sales revenue - cost of sales = Gross Profit Let’s start with mark-up, sometimes called Gross profit markup. The whole idea is that you’ll add a certain mark-up to the product’s Cost. So if you bought an item for £50 and wanted to have a markup of 20%, the selling price is £60 (50x1.2). Now if you work out the gross profit( sales revenue-gross profit) it gives you £10. Gross profit margin is slightly more difficult: this time if we’re basing pricing on margin then we ensure we have a selling price so that when we divide: selling price / gross profit it will equal to the % desired. Example: a product’s cost is £50 and we desire a selling price that will achieve a gross profit margin of 20%To achieve selling price simply get the cost and divide by the inverse: £50 /0.8( inverse of 20%)= £62.5 Now if you work out the gross profit (sales revenue-cost of sales) you’ll get £12.50, if you divide this by £62.50 i.e. the selling price you’ll get 20%. Try the following for yourself before looking at the answer at bottom of page, good luck :). A) A products cost is £80, and the selling price is achieved via a 15% mark-up. What is the selling price and gross profit? B) A products cost is £90 and the selling price is achieved to obtain a gross profit margin of 10%. What is the selling price and gross profit? Answers: A) selling price 80 X 1.15 =£92 Gross profit= 92-80=£12 B) selling price 90 / 0.9= £100 Gross profit= 100-90= £10
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Cost-plus pricing is where you add how much it costs to make a product, then add a percentage of profit on top. Or you can go for Competitive pricing where you look at how much your competitors are pricing their products, then adjust from there. Hope that helps 😊
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