new business module

ESTIMATING INCOME, COST AND PROFIT 95
Session 4: Pricing
There are different ways to set prices. However, three general
points have to be considered:
• the price has to cover the total cost of a product;
• the price should not be higher than what customers are
willing to pay;
• competitors’ prices need to be taken into account.
In the case study, Berthe set the same prices as her lowest-priced
competitors. This is a safe strategy because she knows that they
are able to sell their product at these prices – customers are
willing to buy. Her cost analysis showed, moreover, that with
her estimated sales she would be able to cover all costs.
An entrepreneur can also set a price by determining the total
cost of a product and adding an adequate profit margin. The
profit margin is the positive difference between sales price and
the total cost of a product.
• Profit margin: sales price – product cost
The sales price must be high enough to cover the direct costs,
the indirect costs and depreciation. This means calculating
total costs per unit. This often requires assumptions and is
therefore best explained with an example.