Pricing – JSS3 Agricultural Science Lesson Note (First Term)

Pricing is deciding how much money to charge for something you sell. A good price covers the cost of making the product, leaves a profit and is one customers are willing to pay.

Behavioural objectives

By the end of the lesson, students should be able to:

1. Explain what pricing means.
2. Describe the different ways to set prices.
3. Calculate costs, profit and selling price.
4. Give reasons why prices change.
5. Make a sound pricing decision for a farm product.
6. Compare prices when shopping.

What is pricing?

Pricing is the process of deciding the amount of money a seller charges for a product or service.

• Every seller must do it: a farmer, a shop owner and a hairdresser all set prices.
• Price too high: few people will buy, for example a trader selling tomatoes far above the market rate.
• Price too low: the seller may not make any money.
• Good pricing: finds the amount that covers costs, gives profit and still attracts buyers.

Why is pricing important?

Pricing is important because it decides whether a business makes a profit or a loss.

• Income: it helps a business make money.
• Sales: it decides whether customers will buy.
• Costs: it helps cover the cost of making the product.
• Survival: it helps decide whether a business succeeds or fails.
• Profit: it affects how much profit the business keeps.

Example: If a cup of zobo costs ₦50 to make, you must sell it for more than ₦50 to make a profit.

What are the basic pricing words?

Six words are used again and again in pricing: cost, price, profit, revenue, loss and break-even.

What are the types of costs?

There are four types of cost: direct, indirect, fixed and variable.

What are direct costs?

Direct costs are costs that go straight into making the product.

• Materials: seeds, fertiliser and feed for a farmer; sugar and water for zobo.
• Labour: wages paid to workers.
• Packaging: bottles, cups, bags and crates.

What are indirect costs?

Indirect costs are other costs needed to run the business, not tied to one product.

• Rent: for a shop, stall or land.
• Electricity: bills for power.
• Insurance: protection against loss.
• Advertising: signs and announcements.

Example: For a roadside stand, the rent for the table and the signboard are indirect costs.

What are fixed costs?

Fixed costs are costs that stay the same however much you sell.

• Rent: the same each month.
• Insurance: the same each year.
• Basic phone bill: a set amount.

What are variable costs?

Variable costs are costs that change with the amount you make or sell.

• Materials: more feed is needed for more birds.
• Transport: more goods mean more carrying cost.
• Sales commission: grows as sales grow.

What are the ways of setting prices?

There are four common ways of setting prices: cost-plus, competitive, value-based and psychological pricing.

What is cost-plus pricing?

Cost-plus pricing means adding a fixed profit to the total cost to get the price.

• Formula: Cost + Profit = Price.
• Example: a sandwich costs ₦2,000 to make and you want ₦1,000 profit.
• Answer: ₦2,000 + ₦1,000 = ₦3,000.

What is competitive pricing?

Competitive pricing means setting your price based on what others charge for similar products.

1. Find out what competitors charge.
2. Set a price close to theirs.
3. Charge a little less to attract customers.
4. Charge a little more if your product is better.

Example: If other zobo sellers charge ₦500 a cup, you might charge ₦400 or ₦600.

What is value-based pricing?

Value-based pricing means setting the price by how much value customers think the product has.

• Special features: think about what makes your product different.
• Willingness to pay: consider what customers will pay.
• Benefits: price according to what the buyer gains.
• Example: fresh, well-packed zobo may sell at ₦700 when ordinary zobo sells at ₦500.

What is psychological pricing?

Psychological pricing means choosing prices that make the product look cheaper to buyers.

• ₦999 instead of ₦1,000: looks cheaper than it is.
• ₦1,950 instead of ₦2,000: the same idea.
• Buy 2, get 1 free: seems like a good deal.

How do you calculate a price from a profit margin?

Divide the total cost by (1 minus the profit margin) to find the price that gives the margin you want.

What is the difference between profit margin and markup?

• Profit margin: the share of the selling price that is profit.
• Markup: the percentage of the cost that is added to the cost to get the price.

What are the steps?

1. Find total costs: add materials, labour, overhead (rent, utilities) and other expenses.
2. Choose a profit margin: for example 25% (0.25).
3. Calculate: Price = Cost ÷ (1 – Profit margin).

Worked example:

• Cost = ₦1,000.
• Profit margin = 25% = 0.25.
• Price = ₦1,000 ÷ (1 – 0.25) = ₦1,000 ÷ 0.75 = ₦1,333.33.
• Profit on each item = ₦1,333.33 – ₦1,000 = ₦333.33.

What factors affect pricing?

The main factors that affect pricing are supply and demand, competition, customer income, season and quality.

Supply and demand

• High demand, low supply: prices go up, for example tomatoes in the off-season.
• Low demand, high supply: prices go down, for example tomatoes at the peak of harvest.

Competition

• Many competitors: prices are usually lower.
• Few competitors: prices can be higher.
• Unique products: can charge higher prices.

Customer income

• Wealthier customers: can pay higher prices.
• Lower-income customers: need lower prices.
• Location: affects what customers can afford.

Seasonality

• Harvest time: farm produce is plentiful and usually cheaper.
• Off-season: the same produce is scarce and usually dearer.
• Festival periods: goods in demand, such as rice, chicken and ram, often cost more.

Quality

• Higher quality: can charge higher prices.
• Lower quality: usually sells at lower prices.
• Customers: often pay more for better quality.

What pricing strategies suit different situations?

Pricing strategies are plans for setting prices for new products and for offering discounts.

What are the strategies for a new product?

• Penetration pricing: start with a very low price to attract many customers quickly, then raise it later.
• Skimming pricing: start with a high price for customers who badly want the product, then lower it gradually.

What are the types of discount?

• Quantity discount: a lower price per unit for buying more, such as “Buy 10, get 20% off”.
• Seasonal discount: lower prices in slow seasons, such as a clearance sale.
• Cash discount: a lower price for paying immediately, such as “Pay cash and save 5%”.

What pricing mistakes should you avoid?

The four common pricing mistakes are pricing too low, pricing too high, ignoring costs and not checking competitors.

• Pricing too low: you may not cover costs, buyers may think the quality is poor, and you lose possible profit.
• Pricing too high: customers may not buy, cheaper competitors may win, and you sell very few items.
• Ignoring costs: not knowing real costs, forgetting hidden expenses, and leaving out your own time and effort.
• Not checking competitors: you miss what others charge, cannot tell if your price is fair, and may lose customers.

What are some real-life pricing examples?

Real businesses usually add a markup to cost to find the price.

• Egg farm: a crate costs ₦3,000 to produce, profit wanted is ₦500, so price = ₦3,500 (cost-plus).
• Restaurant: a burger costs ₦3,000 to make (food, labour, overhead), markup is 300%, so price = ₦3,000 × 4 = ₦12,000.
• Retail store: shirts cost ₦10,000 each, markup is 100%, so price = ₦10,000 × 2 = ₦20,000.
• Service: a hair stylist charges ₦2,500 for time, ₦500 for supplies and ₦1,000 for shop overhead, so total = ₦4,000 for one hour.

How do you research prices?

You research prices by checking online, visiting shops and markets, and asking customers.

• Online research: check competitor websites and online marketplaces, and read customer reviews about price.
• Market and store visits: visit similar sellers, compare prices and quality, and ask about discounts.
• Customer surveys: ask what buyers would pay, what features they value and what their budget is.

Why do prices change over time?

Prices change because costs change, the market changes and the business grows.

• Cost changes: materials get dearer or cheaper, labour costs move, rent or other expenses change.
• Market changes: new competitors arrive, customers’ tastes change, and the economy improves or worsens.
• Business growth: bulk buying may cut costs, so you can lower prices, or you can improve quality and charge more.

How do you use a simple pricing worksheet?

A pricing worksheet takes you from your costs to a final price in five steps.

1. List all costs: materials ₦____, labour ₦____, overhead ₦____, total cost ₦____.
2. Choose a profit margin: ____%.
3. Calculate the price: Total cost ÷ (1 – Profit margin) = ₦____.
4. Check competitor prices: ₦____.
5. Decide the final price: ₦____.

• Remember: pricing needs both mathematics and judgement.
• Use calculation: to find a starting point.
• Use judgement: to set the final price.

Evaluation

1. What is pricing?
2. State the difference between fixed costs and variable costs. Give one example of each.
3. A sandwich costs ₦2,000 to make and you want a profit of ₦1,000. Use cost-plus pricing to find the selling price.
4. Calculate the selling price of a product that costs ₦1,500 to make if you want a 40% profit margin.
5. What is the difference between penetration pricing and skimming pricing?

Assignment

Plan the pricing for a simple farm or food product, such as eggs, vegetables or homemade snacks.

1. List all the direct and indirect costs.
2. Find the price of the same item at three shops or market stalls.
3. Use a profit margin of your choice to calculate your selling price.
4. Say whether your price is higher or lower than the others, and give a reason.