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The challenge of determining an “optimum” sales price

Price is undoubtedly one of the most determining factors that buyers take into account upon judging the appeal of a product or service. It is a very delicate process where a price too high can avert prospective buyers while a price too low can generate losses or even create a bad image for the business.

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Published by ConnectAmericas

The main objective of an SME (small and medium enterprise) seeking to penetrate the market is to compete in markets in a consistent and well-targeted manner. According to ProMéxico, the first step for preparing a successful strategy consists of clearly defining if the company is going to penetrate a low cost market (where success will be determined by sales volume) or in a select market that will render a good profit margin (where success will be determined by profit margin other than volume). 

Once this step has been defined, it is important to design a marketing mix consisting of the following elements:

  • A detailed definition of the product to be exported and changes required for delivering it to another market
  • Distribution channels to be used
  • Promotion of the product in the  market and publicizing  the exportable supply  
  • Type of client services that will be offered
  • Price, quotations and sales policies 

All of these aspects will be determining factors upon deciding whether the company will focus on sales volume or profit margin. For example, product adjustments required to export the product impact the price.  Same with promotion, client services offered, distribution channels and the market sector to be targeted.

Defining Price 

SMEs must note that defining price is highly determined by both the competitive strategy and the marketing model that has been selected. It is also important to consider the basic elements of an SME’s exporting operations: 

Operating Information: information on production costs, including adjustments or changes to the product, packaging, labeling and packing is key. It is also important to take into account cost variations based on production volume and production of different products in addition to the objectives of the exporting SME. PYMEX clarifies that it is important to pay attention to gross revenues received by the SME in the domestic market before starting to export. This way, the company can measure the operating efficiency of converting raw material, work and/or service hours to income. Having precise knowledge of the profits in the domestic market can provide a better estimate on how the product will perform in the international market so as to determine an optimum price.   

Target Market Features: studying the target market in depth diminishes the risks of setting an inadequate price. Upon setting export prices it is key to know reference prices of the competition or of similar products, supply volumes, market structure and prospective clients. Equally advisable is to secure information on trade treaties between country of origin and destination market as well as tariff conditions and possible export benefits.

 

Logistics Costs: it is important to obtain precise data on administrative export costs, including fees, commissions or required certifications for establishing a trade price. Other costs can include port and customs clearance, loading and unloading, etc.

 

Following computation of the factors determining approximate exporting value, the businessman must estimate profits over the production cost of the good or service.  

Summing up, with the information described above in hand, an SME can estimate if the price it wishes to set on a product covers all necessary production and exporting costs. The foundation Gas Natural Fenosa explains that this process is known as “determining the profit margin”. That is, the difference between income and total expenses, expressed as a percentage of income.

Constant Revision

Experts recommend revising the factors having an impact on price at least once every four months. According to PYMEX, it is important to make adjustments especially when the cost of a key production component changes during the period.

It is also imperative to take into account that if the company is capable of establishing a good relationship with clients and offers a service or trades a product that satisfies the consumers’ needs, it may eventually hike the prices without losing the business deal, and build a solid financial base for the SME’s future.

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