Page 3: Pricing structure
Pricing is a very important aspect of business. In pricing a product, the emphasis will be on:
- covering costs and then having a margin of profit on top
- making sure that the pricing structure gives a competitive edge over similar products (if any exist)
- providing an adequate return to providers of capital and shareholders in a company.
Bryant Homes sets out to charge premium prices for premium products. It is important to charge a price which is a reflection of the quality of the homes. Buyers would feel that they were being sold short if they were offered the homes at less than a premium price. House purchase is usually the major category of expenditure for adult consumers in this country. In house pricing, it is essential to charge a price which reflects the consumers’ perception of the product. However, it is the market that tends to set the price of housing, in this country.
Factors influencing pricing decisions for Bryant include:
- The cost of buying land. Bryant needs to seek new land constantly to provide an ongoing supply for new developments. It is becoming more difficult to secure prime land because of planning restrictions in this country. Inevitably this pushes up the cost of new land.
- The cost of building. This includes a range of aspects including: sewers, infrastructure, planning permission, engineering costs and the problems associated with cleaning up land (e.g. socalled ‘brownfield sites’ where factories have formerly been located which can be very expensive to clean up).
- The quality of the specification. The more detailed and up-market the specification of a new house, the higher the costs of materials, time and skills required for construction (labour costs), cost of land etc. will be.
- The market in the area. The housing market in this country is very fragmented. In areas of the country which are regarded to be particularly prestigious and sought-after, house prices will be considerably higher than in less desirable locations. Where the market is strongest, the costs of labour, construction and land will also be high.
- Current demand. The demand for housing is cyclical. When there is an upturn in the economy, people are likely to have more disposable income available for house purchase. When there is a downturn, the demand for housing will fall. Changes in house prices tend to be one of the earliest indications of fluctuations in the wider economy.
In deciding on the price to charge for a home, Bryant and other building companies will need to consider:
- How much does an acre of land cost?
- How many houses can be placed on each acre?
- What is the average cost of building each house?
- What are the legal and selling costs for each house?
- What are consumers likely to consider a fair price for the houses?
- What is the ideal competitive price to sell the houses quickly, rather than adding to existing stocks?