Discuss the Major Factors That Should Be Considered in Setting

question 83

Essay

Discuss the major factors that should be considered in setting a product/service price.
A.Costs - One of the important initial considerations in any pricing decision is to ascertain the costs directly related to the product or service (material and labor costs or cost of product from producer).Whether a manufacturer,retailer,or service venture,the entrepreneur would need to ascertain the approximate costs for overhead (some examples would be utilities,rent,promotion,insurance,and salaries).
B.Margins or Markups - In many industries the retailers of the products use a standard markup to price goods in their stores.Given that the retailer maintains costs equivalent to the industry standards,this markup would be expected to cover overhead costs and some profit.Standard markups can be ascertained from trade publications or by asking suppliers.A lower markup and hence lower profit can be accepted by the entrepreneur and is a strategy used to increase demand in the short term (market penetration strategy)but could influence the competition to also lower its price,thus eventually reducing the profit margins for everyone.
C.Competition - When products cannot be easily differentiated,the entrepreneur is forced to charge the same price as the competition.A higher price may also be supported by market research data.Innovations such as technology products or new drug products may warrant a higher price or skimming strategy for the new venture to recover some of its high development costs.In a non-differentiated product market,marketing research may reveal that consumers are willing to pay more if you offer service benefits such as free home delivery,guarantees on the life of the item,or free long-term repair.Although these services would increase the costs to the entrepreneur,they would establish a distinctive image for the product in a non-differentiated product category,allowing a higher price and,potentially,a higher-quality image than that of the competition.

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Definitions:

Real Estate Sale

A financial transaction in which the ownership of property or buildings is transferred from one party to another, often involving negotiation and legal processes.

Revenue Recognition

This is an accounting principle that outlines the specific conditions under which revenue is recognized and determines how it is reported on the financial statements.

Completed Contract

An accounting method that recognizes revenue and expenses only when a contract is completed, not progressively over the life of the project.

Installment Method

An accounting method that recognizes revenue and expenses only when payments are actually received or made, typically used in sales with extended payment plans.