Sound strategy in pricing a service or product

Sound strategy in pricing a service or product

discover | Thursday - 14 / 11 / 2024 - 12:59 pm

Right strategy for pricing a service or product and how pricing affects accounting aspectsPricing a service or product is one of the most important strategic decisions facing any company or institution.

Pricing not only affects the profitability and growth of the project, but also extends to all accounting and financial aspects of the institution. Therefore, understanding how to set the price in a correct and balanced way is of utmost importance to ensure the sustainability of the business and to benefit from a healthy pricing strategy, we advise you to read the article Let your customer set the pricing strategy himself!

 

First: The right strategy for pricing a service or product

The pricing strategy in the Logix system is the framework that guides decisions related to setting prices in order to achieve commercial and financial goals. There are many ways to set prices, and they differ according to the market, the product or service provided, competition, costs, and the target group. In this context, pricing strategies can be divided into several main types:

1. Cost-based pricing:

This type of pricing in the Logix system depends on adding a fixed profit margin to the total cost of producing the service or product. This method is most common in companies that offer products or services with a relatively fixed cost. However, its disadvantage is that it does not take into account the flexibility of the market or the purchasing power of customers.

2. Value-based pricing:

In this strategy, the price is determined based on the value that the customer sees in the product or service. This type is based on the expected benefits that the customer will obtain compared to the cost that he will incur. This strategy requires a deep understanding of the needs of the market and the strength of the brand.

3. Competitive pricing:

Competitive pricing is based on the prevailing prices in the market. Companies that adopt this strategy monitor their competitors’ prices and set their prices in line with those prices, either by imitating them or by trying to outdo them by adding additional value.

4. Psychological pricing:

This type of pricing aims to influence customers’ feelings towards the price. For example, setting a price of 99.99 riyals instead of 100 riyals indicates that the price is significantly lower, even though they are very close.

5. Promotional pricing (special offers):

This type of pricing is used temporarily to boost sales or increase market share. Prices are set for a specific period with offers or discounts that attract customers.

Second: The impact of pricing on accounting aspects

The impact of pricing is not limited to marketing operations only, but extends to the accounting and financial aspects of the organization. Pricing has a direct impact on many accounting items that include revenues, costs, profits, and taxes. The following are the most important accounting effects resulting from setting the price:

1. Revenue management:

Pricing basically determines the expected revenues from sales. Every adjustment in price leads to an adjustment in the revenues achieved. For example, increasing prices may lead to an increase in revenues if sales volume is not significantly affected, or revenues may decrease if the increase causes a decrease in demand.

2. Production and distribution costs:

Pricing indirectly affects how costs are dealt with. In the event of adopting a cost-based pricing strategy, profits will depend on the company’s ability to control production costs. High pricing may allow for covering fixed costs and high profitability, while low pricing may put pressure on the profit margin, which requires improving operational efficiency.

3. Profitability Analysis:

Pricing determines the profit margin, which is the difference between revenues and costs. Pricing a product or service at an ill-considered price may lead to low profit margins, which limits the organization’s ability to cover its fixed and variable expenses. Therefore, it is necessary to analyze profitability periodically using indicators such as return on investment (ROI) and gross margin, to ensure sustainable profitability.

4. Taxes and cash flow:

The direct impact of pricing on revenues also means an impact on cash flows. An increase in sales leads to an increase in available cash. This in turn affects the company’s ability to pay taxes or repay its debts on time. Companies that rely on consistently low pricing may also have difficulty maintaining the cash flow needed for daily operations.

5. Break-even analysis:

The break-even point is the level at which a company makes neither a profit nor a loss, where revenues are equal to costs. The Logix system for determining good pricing helps determine this point more accurately. If the price is too low, the company may need to sell a large number of products to cover costs, while high pricing may mean making a profit faster but with a decrease in sales volume.

6. Pricing and financial forecasting:

Proper pricing in the Logix system helps improve the company’s financial forecasts. If the price is determined based on a comprehensive study of the market and costs, financial forecasts (such as future revenues, costs, and profitability) will be more accurate, which facilitates financial planning and strategic decision-making.

What are the objectives of pricing?

When the management of any company or institution develops a pricing model for a product or service, it sets a set of objectives that control the determination of prices according to its vision. The most prominent objectives of pricing products and services are the following:

1- Continuity in the market:

Pricing in the Logix system aims to find a price that suits consumers, making them stick to the product or service despite the fierce competition it faces in the market; the product remains in the market for the longest possible period, and establishes its roots strongly, and then the pricing process can be reconsidered after it has formed a large fan base for it.

2- Increase profit margin:

Every company seeks to increase its profit margin from selling its products or services based on the state of supply and demand in the market and the quality of the competitor; therefore, we at Logix System were keen that if the supply of a service is high, this will be followed by an increase in its price as well.

3- Controlling the market:

Sometimes some companies set low prices for their products and services; in order to control purchasing operations in the market and achieve the largest possible amount of sales by increasing demand for their products; which ultimately results in a decrease in the cost of production in the company.

4- High prices for innovative ideas

If Logix Company introduces an innovative idea or product to the market, it sets a high price for it; due to the high cost of production to provide all these features in one product, just like large technology companies do.

Conclusion

Ultimately, pricing is a vital element in the success of any business, and has significant impacts on financial performance and profitability. Choosing the right strategy in setting prices for products or services helps achieve a balance between attracting customers and ensuring sustainable profits. On the accounting side, pricing affects revenues, costs, profitability analysis and cash flow, which necessitates a balance between marketing strategies and accounting analysis to ensure sound financial decisions that support the company’s long-term growth.