## Pricing considerations

Setting a price is very important, but can be difficult. The following need to be considered:

• Profit margins
• Costs involved
• Competition
• Target market
• Type of product
• Inflation
• Brand image
• Quality

### Revenue and Price

Revenue—total sales * price of product

A price must be high enough to cover costs and leave a surplus to provide a profit. Bad pricing can cost the business sales.

### Total Revenue

Total revenue can be described as:

• income
• revenue
• sales revenue
• sales turnover
• turnover

Total Revenue (TR) can be calculated by multiplying the average selling price (p) by the quantity sold (q).

## Types of costs

Some examples of costs include:

• packaging
• rent
• wages
• salaries
• distribution
• raw materials
• promotion
• machinery
• production
• running costs

Overall, costs can be split into 2 categories -variable and fixed. A fixed cost does not change based on output, an example of fixed costs is salaries, rent and administrative costs.

Variable costs are costs that do change with output. Examples include raw materials, wages (if hours fluctuate or are piece rate), packaging etc.

Fixed costs (FC) + Variable Costs (VC) = Total Costs (TC)

(Units sold * variable cost per unit) + fixed costs = Total Costs

Average costs—how much it costs to produce a single unit or item.

Average cost per unit = Total costs / Total Output

OutputFCVCTCAC
0400004000-
1040005004500450
2040009604960248
30400016105610187
40400022006200155
50400028006800136
60400044008400140

£175 per unit

OutputTRFCVCTC
00550005500
10175055005006000
203500550010006500
305250550015007000
407000550020007500
508750550025008000
6010500550030008500

## Profit

Profit = total revenue - total costs

Profit is a prime objective for most firms.

• increase sales revenue
• decrease costs

A combination of both is the ideal way of achieving additional profit.

Many other ways do exist—such as decreasing price to increase sales volume and therefore sales revenue.

### Importance of profit

• Profit is a reward for owners and shareholders
• Profit is a motivator
• Profit is a measure of success
• Profit is a source of finance
• A very good source, because it doesn’t require any repayment or investment
• Profit is a guide for future investment
• Profit is attractive to stakeholders

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