Pricing concepts depend very much on the cost of our products and services, as the end price must cover all our expenses and provide a reasonable profit, if we want to stay in business. The costing models are categorized into different groups for costs and dynamic costs. Dynamic cost models are much more complicated and require sophisticated specialists and I would even say mathematicians, we should discuss the full cost model as it gets much wider and easier implementation. The pricing methods are divided into two groups to determine the starting point, and to determine the interrelation then letter is further subdivided into parametric methods and comparative methods. And they consist of relative rates, functional interdependency, comparative economic effectiveness, and comparative analytical methods. You'll see that even the phrases sound very strange and unfamiliar to us.

So we should not study them. I'm joking. These are very decent methods, but their relative newness requires deeper knowledge in pricing methodology. In this course, we should comment on the left leg of the pricing methods, namely, how to determine the starting point. It's to subgroups names, sound very familiar calculative methods separates methods An example of applying the full cost method is a car dealer. Suppose his monthly expenses for running the business, including grant salaries, loan interest, marketing costs, utilities, etc, are $30,000.

These total costs are then charged to the units available for sale, let's say 20 cars 30,000 to 20 equals $1,500 per car. So, the full cost pricing model will lead to full cost per car that equals its purchase value plus $1,500. The total costs can be distributed not only per number of units, but also per value of the units. Let's assume that our car dealer sells also bicycles. For the purpose of our case, let's assume the cars are bought at $20,000. Bikes at $2,000 each.

The ratio is 10 to one, which is exactly the way the total cost should be distributed $1,500 per car $150 per bicycle. Knowing our full cost per unit allows us to negotiate the sale price with greater confidence. The cost plus profit method postulates that we should divide all company costs and profit to the units we sell. In the previous example, the owner now at to the 30,000 monthly costs $10,000 profit and the total amount returned $40,000 Now, by dividing 40,000 to 20 cars, we get a markup of $2,000 per car. Adding that markup to car purchase value, the owner will set the sale price that guarantees him the target profit. direct cost method is more applicable in the manufacturing field and in the huge businesses.

This method allows us to allocate the overheads over a unit or company departments in a non proportional way. calculative methods are very easy to be used, but they do have a major disadvantage. They focus on ourselves, our companies, they do not take into consideration the current market situation in control The group of sellers method focuses on market and competitors its methods assist us in determining a market oriented sell rate of our product or service. Competitors based on market analytical methods are self explanatory. value based method is related to analyzing the value we provide to our customers and turning it into appropriate amount of money. It should answer the question how much the customer will be willing to pay for that value we provide.

This method is the most appropriate for new to their market products or services or in occasions where ours differ very much from those of the competitors. being different, allows us to charge differently from the others. I mean, how Right. However, the sellers methods do not take into consideration our costs, which might lead to a situation where the market rates are lower than our costs. In order to avoid the weaknesses of the two groups of methods, I strongly recommend you to use them in combination. The easiest and the most common combination is the full cost method on competitors based method.

The full cost method set the minimum price we should charge well the competitors based method shows the maximum price zone as in general we cannot be over the market. I say price zone as some minimal price difference unnatural in the business world. You have noticed that examples were related product. This is so us with services we face some specifics that we will discuss in the following topic. Setting the rate per hour in the service sector