Product Pricing

There are a variety of different types of pricing strategies in business. However, there's no one definite, formula-based approach that suits all types of products, businesses and/or markets. Pricing your product usually involves considering certain key factors, including identifying your target consumer, competition analysis and understanding the relationship between quality and the price.

The Basic Rules

No matter what type of product, the price charged to the consumer will have a direct effect on the success of the business. Though pricing strategies can be complex, the basic rules of pricing are straightforward:

• All prices must cover costs (and profits).
• The most effective way to lower prices is to control (if not lower) costs.
• Review prices frequently to assure that they reflect the dynamics of cost, market demand, competition, and profit objectives.
• Prices must be established to assure sales.

Know The Costs

Know the costs of running your business. If the price for your product or service doesn't cover costs, the cash flow will be cumulatively negative, which means, the financial resources will exhaust and the business will in due course not succeed and that is no reason to start a business, no one invests to fail; unless that is your way of spending on charity. Good Luck!

A good idea is to add a %age profit in your calculation of costs. Treat profit as a fixed cost, like a loan payment or payroll, since none of us is in business to break even.

The Right Time

When is the right time to review your prices? When:

• Introducing of a new product or product line;
• Costs change;
• Deciding to enter a new market;
• Competition changes prices;
• The economy experiences either inflation or recession;
• Change in sales strategy.

Pricing - In One Of Four Ways

Cost-Plus Pricing

Many manufacturers use cost-plus pricing. The key to being successful with this method is making sure that the "plus" figure not only covers all overheads but also generates the percentage of profit you require. If the overhead figure is not accurate, you risk profits that are too low. The following sample calculation should help you grasp the concept of cost-plus pricing:

  

Cost of materials	$ 50.00
+ Cost of labor	30.00
+ Overheads	40.00
Total Cost	120.00
+ Desired Profit (20% on sales)	30.00
= Required Sales Price	150.00

Demand Price

Demand pricing is a method in which consumer response to various price points in a range of prices is analyzed to arrive at the highest acceptable price. Also called value oriented pricing.

Demand pricing is determined by the optimum combination of volume and profit. Products usually sold through different sources at different prices e.g. retailers, discount chains, wholesalers, or direct mail marketers etc. are examples of goods whose price is determined by demand.

A wholesaler might buy greater quantities than a retailer, which results in purchasing at a lower unit price. The wholesaler profits from a greater volume of sales of a product priced lower than that of the retailer.

The retailer typically pays more per unit because he or she are unable to purchase, stock, and sell as great a quantity of product as a wholesaler does. This is why retailers charge higher prices to customers.

Demand pricing is difficult to master because you must correctly calculate beforehand what price will generate the optimum relation of profit to volume.

Competitive Pricing

Competitive pricing is generally used when there's an established market price for a particular product or service. If all competitors are charging $100 for a replacement windshield, for example, that's what you should charge and here the profitability is managed through lower/controlled operating costs.

Competitive pricing is used most often within markets with commodity products, those that are difficult to differentiate from another. If there's a major market player, commonly referred to as the market leader that company will often set the price that the smaller companies within that same market will be compelled to follow.

To use competitive pricing effectively, know the prices each competitor has established. Then figure out your optimum price and decide, based on direct comparison, whether you can defend the prices you've set. Should you wish to charge more than your competitors, be able to make a case for a higher price, such as providing a superior customer service or warranty policy. Before making a final commitment to your prices, make sure you know the level of price awareness within the market.

If you use competitive pricing to set the fees for a service business, be aware that unlike a situation in which several companies are selling essentially the same products, services vary widely from one firm to another. As a result, you can charge a higher fee for a superior service and still be considered competitive within your market.

Markup Pricing

Used by manufacturers, wholesalers and retailers, a markup is calculated by adding a set amount to the cost of a product, which results in the price charged to the customer. For example, if the cost of the product is $100 and your selling price is $140, the markup would be $40. To find the percentage of markup on cost, divide the dollar amount of markup by the dollar amount of product cost:

$40 / $100 = 40%

This pricing method often generates confusion and not to mention lost profits, among many first-time small-business owners because markup (expressed as a percentage of cost) is often confused with gross margin (expressed as a percentage of selling price). The next section discusses the difference in markup and margin in greater depth.

Pricing Basics

To price products, you need to get familiar with pricing structures, especially the  difference between margin and markup. As mentioned, every product must be priced to cover its production or wholesale cost, freight charges, a proportionate share of overhead (fixed and variable operating expenses), and a reasonable profit. 

Factors such as high overhead (particularly when renting in prime mall or shopping locations), changeable insurance rates, shrinkage (shoplifting, employee or other theft, shippers' mistakes), seasonality, shifts in wholesale or raw material, increases in product costs and freight expenses, and sales or discounts will all affect the final pricing.

Overhead Expenses

Overhead refers to all non-labor expenses required to operate your business. These expenses are either fixed or variable:

• Fixed expenses

No matter what the volume of sales is, these costs must be met every month. Fixed expenses include rent, depreciation on fixed assets (such as cars and office equipment), salaries, insurance, utilities, membership dues and subscriptions (which can sometimes be affected by sales volume), and legal and accounting costs. These expenses do not change, regardless of whether a company's revenue goes up or down.

• Variable expenses

Most so-called variable expenses are really semi-variable expenses that fluctuate from month to month in relation to sales and other factors, such as promotional efforts, change of season, and variations in the prices of supplies and services. Fitting into this category are expenses for telephone, office supplies (the more business, the greater the use of these items), printing, packaging, mailing, advertising, and promotion. When estimating variable expenses, use an average figure based on an estimate of the annual total.

Cost of Goods Sold

Cost of goods sold, also known as cost of sales, refers to the cost to purchase of products with an intention for resale or to add to the cost to manufacture products. Freight and delivery charges are customarily included in this figure.

Accountants segregate cost of goods on an operating statement because it provides a measure of gross-profit margin when compared with sales, an important yardstick for measuring the business' profitability. Expressed as a percentage of total sales, cost of goods varies from one type of business to another.

Determining Margin

Margin, or gross margin, is the difference between total sales and the cost of those sales. For example: If total sales equal $1,000 and cost of sales equals $300, then the margin equals $700.

Gross-profit margin can be expressed in dollars or as a percentage. As a percentage, the gross-profit margin is always stated as a percentage of net sales. The equation: (Gross-profit / Sales) = Gross-profit margin

Using the preceding example, the margin would be 70 percent.

When all operating expenses (rent, salaries, utilities, insurance, advertising, and so on) and other expenses are deducted from the gross-profit margin, the remainder is net profit before taxes. If the gross-profit margin is not sufficiently large, there will be little or no net profit from sales.

Some businesses require a higher gross-profit margin than others to be profitable because the costs of operating different kinds of businesses vary greatly. If operating expenses for one type of business are comparatively low, then a lower gross-profit margin can still yield the owners an acceptable profit.

The following comparison illustrates this point. Keep in mind that operating expenses and net profit are shown as the two components of gross-profit margin, that is, their combined percentages (of net sales) equal the gross-profit margin:

	Business A	Business B
Net sales	100%	100%
Cost of sales	40	65
Gross-profit margin	60	35
Operating expenses	43	19
Net profit	17	16

Markup and (gross-profit) margin on a single product, or group of products, are often confused. The reason for this is that when expressed as a percentage, margin is always figured as a percentage of the selling price, while markup is traditionally figured as a percentage of the seller's cost. The equation is:

(Total sales - Cost of sales)/Cost of sales = Markup

Using the numbers from the preceding example, if you purchase goods for $300 and price them for sale at $1,000, your markup is $700. As a percentage, this markup comes to 233 percent:

($1,000 - $300) / $300 = 233%

In other words, if your business requires a 70 percent margin to show a profit, your average markup will have to be 233 percent.

You can now see from the example that although markup and margin may be the same in dollars ($700), they represent two different concepts as percentages (233% versus 70%). More than a few new businesses have failed to make their expected profits because the owner assumed that if his markup is X percent, his or her margin will also be X percent. This is not usually the case.

Effective Communication

When the message is understood by the receiver in the same meaning as it was conceived in the brain of the sender that is effective communication.

The ability to do that is, unfortunately, with a few people; it is, however, not a gift with one is born with, it’s an art. To some it does come naturally but it’s not something that cannot be acquired.

Effective communication does require a great degree of being ‘rhetoric’ but that alone does not help. Rhetoric communication always has to be coupled with gestures; enough gestures that help in getting the point across rather than appearing to be speaking with a ‘lah-dee-dah’ accent. Simply, rhetoric communication is what we all refer to as Verbal Communication and the gestures are known as Non-verbal Communication.

A speaker may use verbal communication to transmit his message without any non-verbal tools but then you would notice that apart from the use of words there is a variation in voice, stress on specific words and change in facial expressions. An example of this is the head of state making a televised address to the country.

There are those, who when speak have no facial expressions, no voice variations. An example here is the ex-US President George W Bush.

Communication does not mean just talking nor does it mean the inability to talk fluently in a given language. You would have come across people who cannot speak English very well yet they are able to tell you exactly what they mean and what they want in the first go. That is because they structure their sentences in a way that the message is concise, clear and comprehensive. Language does not remain a barrier anymore. This is what effective communication is all about.

Knowing your target audience, knowing the sensitivity of the message, knowing the distortion and misinterpretation it can go through, you have structure your message in a way that it is well received and understood. This fact is better understood when Nissan had to withdraw its TV commercial last year. Nissan launched their fuel efficient model. It showed Arab sheikhs smashing windows and denting the car’s body just because it was too fuel efficient. Nissan had to apologize and withdraw. Do not try this with your message. People, the receivers of the message may not want to appreciate the creativity if you have hurt their feelings. It will certainly dent if not take away your credibility.

For your message to be well received you need to be credible. Credibility comes over years when your words are backed by your actions and it goes away with one-slip-of-the-tongue. Unless you, like Nissan, want to apologize and withdraw your statement. How well would that do to your credibility?

Speaking purely in terms of business and how communication affects businesses. Communication is the life blood of the business, operationally speaking. Where management does not communicate its goals, its decisions and the logic of its decisions across the organization and also does not make an effort to ask for feedback, especially from people who are on ground doing the job it causes frustration and loss in morale. Where such communication happens, planning is effective and the execution of the plans is efficient. Employees also feel being a part of the organization and the idiom “employees owning the business” actually makes sense.

I read this somewhere and will conclude on with this line, “Communication is the secret of success. Pass it on.”

Corporate Culture

The modus operandi, the response to stimuli, the attitude with which employees work, the manner in which an organization chooses to perform and the flow of information within an organization essentially give it a distinct flavor. It is this distinct flavor that we refer to as Corporate Culture.

Often a phrase is used across the business world that every business is unique and each requires personalized attention and customized solutions; well this is why.

Corporate Culture is like a set of rules of engagement developed in any organization. How will departments or functions communicate with each other? What are the rules of acceptable conduct of employees? and much more.

A culture can be created or reinforced. It is in our control to shape the culture that is the best fit or an organization. Like for example, where you have the top management, the middle management as well as the lower management along with all the factory workers aware of the corporate vision and mission statement known to all, long term and short term strategy shared with all, year-end goals known to all and allowing people from all levels to freely contribute for ways that can help improve the organization in developing it as a revered work-place; such corporate cultures have positive impact on the overall productivity, organization psyche, effectively the work environment therein.

Organizations that boast that “our employees are our most important assets” as a part of their organizational philosophy and on the contrary, employees witness executives (senior and junior) being terminated without any fore-warning or personal contact or someone receiving an email explaining where they will be sitting and who will they be reporting to does not show of a strong culture. Training and development costs are stopped in order to cut costs. Where actions consistently reflect a certain culture, this will effectively emphasize to employees what the top management values are than any publicized statement. Actions have to reflect the culture.

As part of an experiment, they once locked 15 gorillas in a huge cage in a zoo. With all those gorillas in the cage, the zoo-keepers started hanging bananas from the ceiling. The gorillas would try to have them on a first come-first serve basis. On the eighth day when the bananas were lowered and the gorillas tried to have bananas, they were flushed with high pressure water from fire hoses. The water at that pressure hurt the gorillas and slowly after three days they realized that even if the bananas were hung up, the water would be fired at them, hence, they stopped jumping for the bananas anymore. However, when these gorillas stopped responding to hanging bananas, they replaced 14 gorillas (which means only 1 from the first batch remained inside the cage) and lowered the bananas, when the 14 went at the bananas naturally, this one from the original batch attacked all others to stop them from going to the bananas and this happened till the new batch realized they would be attacked. The zoo-keepers brought in the original 14 gorillas back to the cage and now with bananas hanging from the ceiling, no gorilla moves an inch.

Then there are companies with either a strong culture or a weak culture. Ones with a strong culture are those where staff responds to effectively and efficiently to work because of their alignment to the organization’s values. Such organizations operate like ‘well-oiled machines.’ On the other hand, a weak culture depends on an authoritarian (or perhaps bureaucratic) approach on management, resulting in limited alignment to organizational values, employee frustration and dissatisfaction from work.

Studying corporate culture is an essential study in change management; change management requires strong leadership and clear communication of the expectation based on the new road map that was already communicated.

Corporate Governance

Governance is the setting of expectations, the grant of power and monitoring performance against the set expectations. These expectations, either in governments or businesses are goals set by the managers therein. For a government, it comes from the manifesto that they float during their election campaigns and as for the businesses, it comes as a strategic business plan; both are broken down into various categories and almost each category having a distinct goal for itself. In many well defined documents, how the government or the management of the business intends to accomplish these goals is clearly set. How effectively do these managers achieve these goals and while achieving these goals what exactly was the modus operandi - how did they behave as an individual and as an entity - or simply put, Corporate Governance.

The most influential parties involved in corporate governance include governmental bodies, stock exchanges, the management itself (including the board of directors and its chair, the CEO or equivalent, other executives and line managers, shareholders and auditors). Other influential stakeholders may include lenders, suppliers, employees, creditors, customers and the community at large. 

Corporate governance is the set of policies and procedures, rules and regulations even as much as a code of conduct that manages the processes in the organization which effectively control the direction of the company and reflect its management style while highlighting the attention it sets on CSR, the environment, obligation to customers and its commitment to product quality. 

Corporate governance spills over all areas of the business and its management. To wrap it all up the UN Intergovernmental Group of Experts on Good Practices in Corporate Governance Disclosure. This document captures good corporate governance in the following 5 broad categories:

1. Auditing
2. Board and management structure and process
3. Corporate responsibility and compliance
4. Financial transparency and information disclosure
5. Ownership structure and exercise of control rights

The Organization Structure

Corporate governance is hugely affected by ownership structures and the dominance of individuals within.

A family owned business structure is going to be well weaved and be dominated by the eldest member, usually, sitting at the top as against the public company being run by a bureaucrat. This alone allows the family owned business to react faster than the public company which no matter has realized the urgency would still have to go through a lot of red tape before it can plunge into the opportunity.

Similarly, a top performing individual would have to wait till his year end review/appraisal or a very important task that he pulls off saving the company its image and dollars (both or whichever comes first) to an individual in the family owned business who could attract attention, responsibility, power and rewards fairly easily. 

In a recent study by Credit Suisse found that companies in which "founding members retain a stake of more than 10% of the company's capital enjoyed a superior performance over their respective sectorial peers."

Each business structure has to be managed in a way where the costs, benefits, processes and the time taken to get the job done bring about optimal performance.

Popular principles of corporate governance

• Rights and equitable treatment of shareholders
• Interests of other/minor shareholders
• Roles and responsibilities of the Board
• Integrity and ethical behavior
• Disclosure and transparency

Corporate Governance Through Built-in Internal Controls

Corporate governance internal controls monitor activities and then take relevant and necessary corrective (or to some extent 'reactive') action to accomplish organizational goals. Examples include:

Monitoring by the Board of Directors

• The Board of Directors, with its legal authority to hire, fire and compensate top management
• Regular Board meetings allow potential problems to be identified, discussed and avoided
• Whilst non-executive Directors are thought to be more independent, they may bring in experience in overall performance of the organization but then they may not always result in more effective corporate governance

Internal control procedures and internal auditors

•  Internal control policies and procedures are implemented by the Board, the audit committee, management and other personnel to provide reasonable assurance of the entity achieving its objectives related to the financial reporting, operating efficiency and compliance with laws and regulations.

Balance of power

• The simplest balance to power is very common; require that the President be a different person from a Treasurer
• There should be clear distinction as to who is doing what and what does the job description say in the first place?
• In case where there are for any reasons overlaps in the job descriptions, how will things be rearranged to get the most out of employees' efforts?

Remuneration

• Performance based remuneration is designed to relate some proportion of salary to individual performance. It may be in the form of cash and non-cash payments such as shares and shares options, end of service benefits or other benefits
• Such incentive schemes, however, are reactive in the sense that they provide no mechanism for preventing mistakes or opportunistic behavior and any intolerable behavior 

A continual process

As a process, governance can operate in an organization of any size; from a single human being to a corporation spanning continents whether it does or does not work for profits. A reasonable or rational purpose of governance might aim to assure, that an organization produces worthwhile pattern of good results while avoiding an undesirable pattern of bad.

Business Architecture

Business architecture (BA) establishes the company-wide or an organization-wide road map to achieve its corporate mission. This can be made possible through optimized performance of its core business processes within an efficient IT environment. In simpler words, BAs are well thought, chalked out execution documents - blueprints – as the engineer friends call them - for systematically and completely defining an organization's current (baseline) and/or desired (target) environment.

BAs are essential for developing information systems and those newer systems that optimize business performance. This includes a well-thought and detailed plan for transitioning from the baseline environment to the target environment; effectively, change management. If clearly defined, adequately maintained, and implemented properly, these BA blueprints assist in optimizing the work and document flow in an organization's business operations and the underlying IT that support operations. Without complete and enforced BA, organizations run the risk of buying and building systems that are duplicative, incompatible, and unnecessarily expensive to maintain.

Business Architecture is a strategic information–asset base, which defines the mission, the information necessary to perform the mission and the technologies necessary to perform the mission, and the transitional processes for implementing new technologies in response to the changing mission needs. Business architecture includes baseline architecture, target architecture, and a sequencing plan.

Architecture is the structure of components, their interrelationships, and the principles and guidelines governing their design and evolution over time.

Organization is any entity supporting a defined business scope and mission. An organization includes interdependent resources (people, organizations, and technology) who must coordinate their functions and share information in support of a common mission (or set of related missions).

Baseline architecture is the set of products that portray the existing enterprise, the current business practices, and technical infrastructure. Commonly referred to as the As-Is architecture.

Target architecture is the set of products that portray the future or end-state enterprise, generally captured in the organization's strategic thinking and plans. Commonly referred to as the To-Be architecture.

Sequencing Plan is a document that defines the strategy for changing the enterprise from the current baseline to the target architecture. It schedules multiple, concurrent, interdependent activities, and incremental builds that will evolve the enterprise.

Business Architecture Products is the graphics, models, and/or narrative that depicts the business environment and design.

BA terminology carries many variations within each organization and in the vast array of literature. Although the term business is defined in terms of an organization, it must be understood that in many cases, the business may transcend established organizational boundaries (e.g., sales, marketing, finance and accounting logistics, inventory flow, HR).

In general, the essential reasons for developing a BA include:

• Alignment – ensuring the reality of the implemented enterprise is aligned with management's intent
• Integration - realizing that the business rules are consistent across the organization, that the data and its use are immutable, interfaces and information flow are standardized, and the connectivity and interoperability are managed across the enterprise
• Change - facilitating and managing change to any aspect of the enterprise
• Time-to-market - reducing systems development, applications generation, modernization timeframes, and resource requirements
• Convergence - striving toward a standard IT product portfolio

 

Tangible benefits

A BA offers tangible benefits to the enterprise and those responsible for evolving the enterprise.

The BA can:

• Capture facts about the mission, functions, and business foundation in an understandable manner to promote better planning and decision making
• Improve communication among the business organizations and IT organizations within the organization through a standardized vocabulary
• Provide architectural views that help communicate the complexity of large systems and facilitate management of extensive, complex environments
• Focus on the strategic use of emerging technologies to better manage the enterprise's information and consistently insert those technologies into the enterprise
• Improve consistency, accuracy, timeliness, integrity, quality, availability, access, and sharing of IT-managed information across the enterprise
• Support the processes by providing a tool for assessment of benefits, impacts, and capital investment measurements and supporting analyses of alternatives, risks, and tradeoffs
• Highlight opportunities for building greater quality and flexibility into applications without increasing cost
• Achieve economies of scale by providing mechanisms for sharing services across the organization
• Expedite integration of legacy, migration, and new systems
• Ensure legal and regulatory compliance. The primary purpose of a BA is to inform, guide, and constrain the decisions for the organization, especially those related to IT investments. The true challenge of enterprise engineering is to maintain the architecture as a primary authoritative resource for enterprise IT planning. This goal is not met via enforced policy, but by the value and utility of the information provided by the BA.

Architecture Principles

There are principles that govern the BA process and principles that govern the implementation of the architecture. Principles help devising rules, rules in turn dictate the organization's behavior. Architectural principles for the BA process affect development, maintenance, and use of the BA itself. Architectural principles for BA implementation establish the first doctrine and related decision-making guidance for designing and developing information systems.

The Chief Architect, in conjunction with the CIO and select business managers, defines the architectural principles that map to the organization's IT vision and strategic plans. Architectural principles should represent fundamental requirements and practices believed to be good for the organization. These principles should be refined to meet the organization's business needs. It should earnestly try to map specific actions, such as BA development, systems acquisitions, and implementation, to the architectural principles. Deliberate and explicit standards-oriented policies and guidelines for the BA development and implementation are generated in compliance with the principles. Each and every phase of the Systems Life Cycle is supported by the actions necessitated by the architecture principles.

 

The Business Life Cycle

The business life cycle is the dynamic, repetitive process of changing the enterprise over time by incorporating new business processes, new technology, and new capabilities, as well as maintenance and disposition of existing elements of the enterprise.

Although the BA process is the primary topic, it cannot be discussed without consideration of other closely related processes. These include the business engineering and program management cycle (more commonly known as the system development / acquisition life cycle) that aids in the implementation of a BA.

Overlying these processes are human capital management and information security management. When these work together, effectively and effectively, the organization can effectively manage IT as a strategic resource and business process enabler. When these processes are properly synchronized, systems migrate efficiently from their baseline legacy technology environments through evolutionary and incremental developments to their target environments, and eventually to prove the point that the investment has been worthwhile.

 

The Business Architecture Process

As a prerequisite to the development of every business architecture, each organization should establish the need to develop a BA and formulate a strategy that includes the definition of a vision, objectives, and principles. The drawing alongside, shows a representation of the BA process.

1. Executive buy-in and support should be established and an architectural team created within the organization.
2. The team defines an approach and process tailored to organization's needs.
3. The architecture team implements the process to build both the baseline and target BAs.
4. The architecture team also generates a sequencing plan for the transition of systems, applications, and associated business practices predicated upon a detailed gap analysis.
5. The architecture is employed in the business engineering and program management processes by way of prioritized, incremental projects and the insertion of emerging technologies.
6. Lastly, the architectures are maintained through a continuous modification to reflect the organization's current baseline and target business practices, organizational goals, visions, technology, and the required infrastructure.