For COMPUTER STUDENTS

1. INSTITUTE OF ACCOUNTANCY ARUSHA
Pricing Strategies for ICT Products and Services

2. Pricing strategies
• Pricing strategies are the methods and approaches used by
businesses to determine the prices of their products or services.
• These strategies aim to maximize profits and achieve specific business
objectives, such as:
increasing market share
improving brand perception
maximizing customer value.

3. Pricing strategies
• Various factors when determining the most suitable pricing strategy:
Target market
Market demand
Competition
Cost structure
Product differentiation
Customer preferences

4. Pricing strategies
• There are several different pricing strategies that businesses can
employ, including:
1. Cost-based pricing: This is a straightforward approach where
businesses determine the price by calculating the production costs
and adding a desired profit margin.
2. Market-based pricing: The price is set based on the prevailing
market conditions, including the level of competition, customer
demand, and the perceived value of the product or service. The
price is determined by assessing what similar products or services
are being sold for in the market.

5. Pricing strategies
3. Penetration pricing: This involves setting a low initial price for the
ICT product or service to gain a larger market share quickly. The aim is
to attract new customers and build brand loyalty. Over time, the price
may be increased once the product/service gains popularity.
4. Competitive pricing: The price is set to match or slightly undercut
the prices of competitors offering similar ICT products or services. This
can help a business position itself as a viable alternative in the market
and attract price-sensitive customers.

6. Pricing strategies
5. Bundle pricing: This involves offering a package deal where multiple
ICT products or services are sold together at a discounted price
compared to buying them individually. This approach can help increase
sales and provide customers with added value.
6. Value-based pricing: The price is set based on the benefits and
outcomes that the customers receive from using the product or
service. This approach requires understanding customer needs and
preferences to determine the perceived value and setting the price
accordingly.

7. Pricing strategies
7. Price skimming: This involves setting a high initial price for a new or
unique product, taking advantage of customers' willingness to pay a
premium. Over time, the price is gradually lowered to attract a broader
customer base.
8. Dynamic pricing: Adjusting the price of a product or service based
on various factors such as demand, supply, competition, or customer
behavior. Example Uber service

8. Cost theory
• Cost theory is an economic concept that examines the relationship
between the cost of production and the quantity of goods or services
produced.
• It involves analyzing the different costs incurred by firms in the production
process and how these costs affect the firm's decisions about production
levels, pricing, and overall profitability.
• These focuses on (types of cost):
Total cost: The sum of all expenses incurred by a firm in producing a given
quantity of goods or services.
TC = FC + VC where VC = QUc
Fixed costs: Expenses that do not change with the level of production. This
include costs like rent, mortgage payments, and equipment depreciation.
These costs must be paid regardless of the firm's level of output.

9. Cost theory
Variable costs: Expenses that change proportionately with the level of
production. Examples of variable costs include labor costs, raw material costs,
and utility costs.
VC = Quantity x Unit cost
Average cost: The total cost divided by the quantity of output produced. It
represents the average cost per unit of production.
AC = Total cost/total output
 Marginal cost: The additional cost of producing one more unit of output. It is
calculated by taking the change in total cost divided by the change in quantity
produced.
MC = total cost/ quantity produced(output)
 By understanding the different cost components, firms can identify areas for cost
reduction, improve efficiency, and optimize their production process.

10. Cost theory
• Other types of cost are:
Explicit costs: Monetary expenses that a firm incurs in order to operate its
business. Examples include wages, raw material costs, and rent.
Implicit costs: Non-monetary opportunity costs that arise from using
resources in a particular way. Examples include the value of the owner's
time or the use of the owner's personal capital.
Sunk costs: Costs that have already been incurred and cannot be
recovered. They should not be considered in decision-making processes.
Opportunity costs: Costs of forgoing the next best alternative when
making a decision.

11. Revenue
• Revenue refers to the total amount of income generated by a
company or organization during a specific period.
• It is the money that comes in from the sale of goods or services.
• Revenue can also include other sources of income such as
investments, interest, or royalties.
• Revenue is an important financial metric as it indicates the company's
ability to generate income and is a key component in determining
profitability.
Total Revenue = Quantity (Q) x Revenue per Unit (P)

12. TC – FC – VC relationship

13. The profit concept
• The profit concept refers to the fundamental idea that businesses aim
to generate a profit.
• Profit is the financial gain that a company makes after deducting all
the expenses and costs incurred in producing and selling goods or
services.
• Profit is the difference between the total revenue generated by a
business and its total costs.
Profit = Total Revenue – Total costs
• It is an essential measure of business success as it indicates the ability
of a company to generate revenue and manage costs effectively.

14. The profit concept
• The profit concept is a core principle of any firm and serves as a key
indicator of the financial health and viability of a business.
• It enables companies to reinvest in their operations, expand their
business, pay dividends to shareholders, and reward employees.

15. Types of Profit
• Gross profit is the difference between the cost of goods sold and the
revenue generated from their sale.
Gross Profit = Total Revenue – Total cost of goods sold
• Operating profit takes into account all expenses related to the daily
operations of the business, such as salaries, rent, and utilities.
Operating Profit = Total Revenue – Total Operating Costs
• Net profit is the final result after deducting all expenses, including
taxes and interest.
Net Profit = Total Revenue – Total Costs

16. Break-Even Analysis
• The break-even point is the point at which total revenue equals total
costs, resulting in zero profit or loss.
• It is the level of sales or production at which a business covers all its
costs, both variable and fixed costs.
• To calculate the break-even point:
 We need to determine the fixed costs and the variable costs per unit.
Wher Fixed costs are expenses that do not change regardless of the
level of production or sales, such as rent, insurance, salaries, etc.
Variable costs are expenses change with the level of production, such
as raw materials, direct labor, etc.

17. TC – TR Relationship

18. TC – TR Relationship
Where BEP – Break Even Point at which TC = TR

19. Break-Even Analysis
• The formula to calculate the break-even point is:

20. Break-Even Analysis
Example 01
IAA cafeteria has fixed cost of $10,000 this period. Direct labor cost is $1.50 per unit, and
material is $ 0.75 per unit. The selling price is 4.00 per unit. Compute the BEP
(a) In units
(b) In dollars
Example 02
A company sells its products for $20 each and has total fixed costs of $10,000. The variable
cost per unit is $5. What is the break-even point in units and $?
Example 03
A restaurant has fixed costs of $6,000 per month. The average revenue per customer is
$30, and the variable cost per customer is $15. What is the break-even point in terms of
the number of customers and $?
Example 04
A company has fixed costs of $50,000 and a contribution margin ratio of 0.4. What is the
break-even point in terms of sales revenue?

21. Break-Even Analysis
Example 05
Assume a company's fixed costs amount to $100,000, and the variable
cost ratio is 60% of sales. How much the company must generate to
break even?
Example 06
Assume a company produces two products: Product A and Product B.
Product A has fixed costs of $40,000, variable costs per unit of $5, and
sells for $15. Product B has fixed costs of $20,000, variable costs per
unit of $3, and sells for $10. Calculate the number of combined
products to be generated to break even.

22. Break-Even Analysis
• The break-even point, determine how many units or the sales volume
required to cover all costs and achieve neither profit nor loss.
• It is an important financial indicator for businesses to assess their
profitability and make strategic decisions regarding pricing, sales
targets, and cost management.