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We see companies especially start-ups and early-stage ones in manufacturing industry often struggle with costing and pricing. Costing and Pricing go hand in hand as Gross Profit is Revenue (Price x Volume/Quantity Sold) - Cost of Goods Sold.
Sales team may want to keep the prices low to increase sales, increase revenue, earn more commission, while Production team want flexibility in costs to meet their design goals. With a small team without much experience and not enough structure and information transparency, costing and pricing can create much conflict across the board and management team often try to hire different personnel to handle and solve this problem.
Unfortunately, a single person can not go in and fix these issues in the long-term because costing and pricing go much deeper than just simple numbers. Not only thorough understanding of pricing and costing structures as well as information technology are needed, but a complete understanding and decision making for the brand and where its goals are, where it stands in the market must be understood to derive long-term solutions. The goals of a brand -- must be set by the executive members and after goals are set, must be followed by the team/company as a whole.
First we must identify:
Are we Price-Makers or Price-Takers?
We have to look at our goods and see where the goods stand in the marketplace. Are we price-makers or are we price-takers?
"A price taker, in economics, refers to a market participant that is not able to dictate the prices in a market. Therefore, a price taker must accept the prevailing market price. A price taker lacks enough market power to influence the prices of goods or services.
If goods sold are very similar to what is already available at the market, without (or little) brand loyalty, and market has large number of buyers and sellers with access to information it's a competitive market without much of a price-setting power.
Even with some brand loyalty, most organizations actually do not have the ability to set the price completely on their own in the marketplace. $5,000 t-shirt won't be selling in high enough quantities to derive the business in the long-term, for example (unless it has monopolistic technology with completely inelastic demand, which is unrealistic). Organizations may be able to take the higher range of price already existing in the market place but often do not have power to set a completely new price due to law of supply and demand. (Of course, there are very short-term exceptions with more power of price-setting with strong brand loyalty customer groups or limited edition goods, etc. which shifts the demand higher and supply lower as limited editions do not have high supply).
Example we have experienced was Kylie's limited edition lip goods when it was first introduced at the market few years ago. It was sold out in 24hours.
Demand was high, and supply was low. Kylie created her own unique lip shades her fans of millions already loved and only released liquid lips, hot at that time and in demand, in a small quantity. Sold out, but in quantities significantly lower than brands already selling all over the country over ten-folds in thousands of locations. The brand eventually started a much larger and successful beauty company and you can see here that the price is within the range of similar items ($16-17/single lip good) though with a significant brand power. But, on the higher price side for the age group and demographic of the young customers and a much lower price than luxury beauty brands such as Chanel Beauty and Tom Ford Beauty with older demographics ($36-38 to $55 for unique items and $60 for limited edition) because quantity sold will decrease for Kylie's customer demographics if sold at this luxury price range.
"The law of supply states that the quantity of a good supplied rises as the market price rises, and falls as the price falls. Conversely, the law of demand (see demand) says that the quantity of a good demanded falls as the price rises, and vice versa." https://www.econlib.org/library/Enc/Supply.html
Not exactly so in real life with varying factors, but we can see that demand increases for same goods during holiday Sale, introductory price sale, and how luxury goods can manipulate prices to an extent by supplying fewer goods at higher prices (than higher supply with higher price per law of supply and demand). However, for overall company Revenue to increase and compete, there are market limitations to pricing. (High-priced limited goods will not sell at high price in large quantities and Revenue is Price x Volume).
Therefore, a thorough research and comparison of customer base, competitors (industry and product) and marketplace must be done before setting prices of goods and a decision/goal for revenue and quantity sold must be discussed. This is a time consuming research but can be easily done these days with the help of some market research softwares and paid data. If brand power is strong, a higher price within the range of market place can be taken, vice versa.
Also, we can not forget the entry point. Just like the stock market, entry point does matter meaning when products are released to the market place.
For a company to be a complete price-maker, it has to be a monopolistic company without substitutes and competition. They are also leaders in their industries. We see such situations exist in short-term for newly discovered pharmaceutical drugs with patents. For a number of years they are able to hold their monopolistic power until generic goods are available at the market. (Which drives down their price thereafter.)
In the next blog, we will review three basic approaches of setting prices.
*This blog is researched and written by Opere Suo Group other than quotes with hyperlinks attached. All rights reserved.
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