Mei 23 2008
Product or Service Pricing
Pricing is perhaps the most difficult and cumbersome aspect of doing business. The price given to your product has more than just monetary or economic implications. It may also touch the psychological implications as well. For example, if you price your product 20 percent less than the competitors, some buyers may simply take it as a cheaper price and for them it is an advantage but for more thoughtful buyers a reduced 20 percent price can mean anything from low-quality product to scrapped product.
So to best determine how to price your product, it is essential to be aware of the competition and the marketplace around. There are at least three criteria for setting the prices of your products and services as given in detail below:
Cost-Based Pricing:
Using this method, you calculate the costs of the components needed to produce each item in the line of products and services. You set the price of each item at whatever amount is required to pay back these costs and produce a margin of profit. As the costs of these components fluctuate, you reset your prices to reflect the latest round of changes.
Cost-based pricing can work well in heavily costumised products, particularly when there is a heavy service-component to your offerings. The cost of labour is naturally one “component” in every product or service, and it will automatically reflect the cost of customising a product or providing a unique service to a customer.
This pricing method is common in the public sector too where cost-plus contracts are often more “acceptable” and easier to adiministrate than other pricing schemes.
Brief Scheme:
Cost of Products + Profit = Price
Market-based Pricing
This pricing method is suitable whenever you operate in a very competitive market. The only viable basis for setting prices in this kinda environment is to stick to “what the market will bear”. Using this approach you set prices at the level of competition with possibly a little variation (above or below). That is important to position your products or services as the best choice for consumers desiring quality, lower prices or special features that they prefer.
Market-based pricing provides a strong discipline for the organisation to hold down some costs, transfer other costs to customers or suppliers, and increase sales volume in order to benefit from the economy. For example if the costs are increased and you sell furniture, you can switch to knockdown furniture which leaves the “cost” of assembling to the consumers and at the same time reducing the cost of shipment from the factory.
Brief Scheme:
Product =< Competitor = Price
Profit-Based Pricing:
This approach makes the most sense when there is only little competition around. Knowing the total monthly or annual expenses and sales volume, you set your prices to cover your costs and provide whatever level of profit you want (frankly it reminds me of TELKOM’s services a few years ago! ouch!).
For example, suppose that keeping the costs Rp. 1 billion a month and each month you’re selling 10,000 units. It’d take an average price of Rp 100,000 per unit to cover your costs (using the breakeven analysis method which we will possibly discuss in the future in my article). if you want to make Rp. 50,000,000 per month, you simply set your prices at the proper level - in this case, Rp 105,000. (Please correct the figures if I’m mistaken, I did not use calculator to come up with the figures because IÂ was in a hurry! 
Please help me correct it, if the calculation above is a mess!)
So, shortly said, in this kinda pricing, you are the king and you ‘control’ the market, you set the profit ‘whatever’ you like until it shows a down-sloping line in your sales chart!
Brief Scheme:
Cost of Product + Other Expenses + Profit = Price
How about risk-based pricing particularly in service charge, is there any techniques for this?
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The Blog’s Owner:
Risk-based pricing is usually applied in financial services, but this kind of services is not market-based nor consumer-based services, it only accounts for not too significant portion in business. Of course there are a few techniques for this method but it is too prolix to write them down especially when you know that this blogsite does not support LaTex which enables us to write math formulae. NPV and IRR are the ones used amongst many others in this method.
Sorry little bit confuse, so we can use NPV and IRR to analyze the risk also? What kind of risks?
How about office space-rental rate in a multi-stories building/tower with assumptions;-100% investment by owner? I know there are, maintenance fee, insurances, and tax (VAT, WHtax, Final tax income), and the risk are fire, earth quake, etc… so how to determine the rental rate based on NPV & IRR analyze for this case? (I don’t need formula, just want to know how to put the risks component into cost of capital percentages)
…. thank you Boss…
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The Blog’s Owner:
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Take a careful look at my previous response. It says “used amongst many others”, it means those NPV and IRR do not necessarily exist in every case! Understood?
In your case, it is even simpler! those risks that include fires, quakes, floods or even tsunamis and meteor-hits
can be taken into extraordinary costs and it can be included as the cost of products and you simply treat it like cost-based method above, but if you want to separate the extraordinary costs from the cost of products that would be fine too, it can still be classed as the cost-based pricing. In this case of course you don’t need NPV nor IRR to come up with the pricing. 
Well, in some businesses they may call it “cost-based pricing” but maybe for yours and for those who enjoy the term “risk-based pricing” that will do fine as well.
Or do you simply mean by, HOW TO CALCULATE THE RISKS (COST) ?? Is that what you mean??