Pricing is the process of determining what a company will receive in exchange for its products. It is the method a company uses to set the price for its product, that is an economic concept in which the customer and the service provider in a transaction aim to maximise their satisfaction. The customer aim to buy at a price which maximises their perceptions of benefits and value for money as they choose from competitive markets on offer and the service provider also aim to reach or exceed targeted objectives of revenue. Pricing must always be evaluated based on their impact on total revenue and not on the profit of one item alone. An increase in price will decrease the quantity sold, this is because the increase in price will make the product or services less affordable and the customer will seek alternative service or products elsewhere while if there is decrease in price, the quantity of services or items sold will increase, because a decrease in price will attract more customer in purchasing product and services. Example:- in a coffee shop that specialised in cup cakes, decided to increase the cost of their cup cake without added value there is a big possibility that the sales revenue will drop because the customer, may decides to look elsewhere the service at the former price, but if it was a plain cake before and maybe raising were added, there may be balancing in revenue or even increase in revenue. The table below gives an illustration on how increase in pricing may affect the total revenue, and when added value, will might increase the sales revenue.
| Old price| New price| Number sold| Total revenue| Impact on revenue| | €| €| | €| |
1. | 2.00| | 500| 1,000.00| |
2.| | 2.50| 400| 1,000,00| No change in revenue|
3.| | 2.50| 300| 750.00| There is decrease in revenue| 4.| | 2.50| 500| 1,250| Value must have been added, so there is increase in the revenue| 5.| | 2.50| 600| 1,500| More increase in revenue.|
Question 2, what are the accepted formats of pricing used in the hospitality industry. Pricing formats for products or services include the following: 1. Cost pricing
2. Market pricing
3. Gross profit margin
4. Full/marginal costing
Cost pricing – under this type of pricing, the consideration for determining initial price is the cost of production. This is an easy method of pricing as long as costs are known but the disadvantage is that consideration of the product or service demand of targeted market is not consider whether the service or product is operating in a highly competitive market where competitors frequently alter their prices. Under cost pricing there are two method of pricing; A. Cost-plus pricing
B. Mark-up pricing
Cost-plus pricing is the simplest pricing method. The company calculates the cost of producing the product and adds on a percentage (profit) to that price to give the selling price. These costs are converted to per unit costs for product and then predetermined percentage of these costs is added to provide profit margin. Full cost pricing which takes into consideration both variable and fixed costs and adds a % mark-up. (VC+Fc = Tc)*(1+ %) = price. It’s calculated per unit. For example, if in production of a cup cake the variable cost is €1.00 and the fixed cost is 50c and percentage added is 40%, the price of the cup cake will be (€1+50c)*(1+0.4) =price
Mark-up pricing is the practice of adding a constant percentage to the cost price of an item to arrive at its selling price. Many resellers, and in particular retailers, discuss their mark-up not in terms of Mark-up-on-Cost but as a reflection of price. That is, the mark-up is viewed as a percentage of the selling price and not as a percentage of cost as it is with the Mark-up-on-Cost method. (www.knowthis.com) This is the different...