I am in the process of launching my firm which will supply business promotion merchandise like bags, apparels, gifts, gadgets and so on. As the business owner I would be deciding on the margins initially.
But later when the business grows, should there be process for institutionalising pricing. How does manufacturing companies decide on the price. I know some do based on IRR or Pay Back time. We will be part manufacturing and part sourcing. Most of the times we can put a simple rule that its COGS + X%. But when there is huge order, there's negotiation always. So how do I model the pricing process so that I the firm runs even in my absence or my interference.
Any insights about the pricing process would be of great help to me.
This seems a little premature, since you're just launching the business. If I were you, I would experiment with pricing to see what the market will bear. You might find that the market will not pay more than $X for your product, no matter what. In that case, you have to figure out how to reduce your costs and such, and you can't set the margin up-front.
Do a soft launch. Get some customers. Sell them at whatever price they'll pay. Get a lot of feedback from them. Improve the product. See if you can sell it to the next group of customers at a higher price. Repeat until satisfactory ;)
By the time you do this 2-3 or more times, you'll know a lot more about your margins and your cost structure. Then you can step back and re-evaluate the plan, if needed.
Pricing is typically driven by the market. If the goods you're supplying are commodities then you're going to have low margins on cost of goods sold, and going to have to sell for the same price as your competitors.
If your products are niche then you likely won't have direct competition and you can then charge whatever the market will bear.
Your pricing should be based on the value you deliver. If you just deliver the same thing that everyone else in your market can deliver, then your value is probably very close the cost of the goods you supply.
If this is true then your whole play is price. In this case, just see what your competitors charge and you can probably charge about the same. figure out how you can cut costs to deliver the same thing as everyone else in your space? Competing on cost alone is really not a great model though.
If you can figure out something else that will differentiate your company or your products, you may be able to justify a higher price. (For example, better customer service can make you stand out.) People will pay for the value you deliver.
Practically, price is always equal to what you customers are willing to pay.
It quite easy actually -
Price per order = (Fixed costs + Variable cost/item + Min. profit you expect) + Some extra amount to make more money or negotiate. Fixed costs will be almost same for each order, however big or small it is.
Variable cost will depend on your order size. You'll need determine both costs.
You won't be able to sell if market price is less than (Fixed costs + Variable cost/item + Min. profit you expect)
Now we come to customer acquisition strategies -
Sometimes you'll want to sell at a loss to attract new customers, grab attention etc. That's all marketing.
From what I understand, you are about to enter a very competitive market, where most of the merchandise is being produced in china. Since there are lots and lost of different Chinese companies producing virtually the same promotional products, the prices should be low, and determined by the market.
If you found a niche in that market that allows you to charge higher prices without the competition taking away your market share, more power to you. Until that happens, see how much you can charge, which will probably be COGS + your margins