IMPLEMENTING PRICING STRATEGY ……………………… College………………………………. …………………. Introduction Dealing with both internal and external information within the organization is critically important to effectively manage a business. Accounting information is basically a decision support tool for the management. As far as marketing functions are concerned, cost-volume and profit-cost relationships are significant areas that marketing department or management depend on for various strategic decision making. This paper provides a brief report on pricing strategy, variable and fixed costing and significance of incremental cost in pricing decisions. 1. Contribution is calculated based on price and costs.
Often, we treat these variables as fixed. What are the implications of treating uncertain variables as fixed? Variable costs are those costs that increase or decrease with the increase or decrease in the volume produced, and they remain constant on a per-unit basis. Raw-materials and production costs are variable since additional quantities are required if additional volume is to be produced. Fixed costs, in contrast, remain constant even though there is an increase or decrease in the quantities of output produced (Hilton, Maher, and Selto, 2006, p. 58). Contribution is the difference between the price and variable cost of a product, and this represents the proportion of the price that remains after the variable costs are covered.
For instance, if variable costs are 65 percent of the price, the contribution margin is 35 percent. Contribution is treated as fixed and the major implications are that if the product is priced lower than the variable costs, the contribution will be a negative figure. In long term, all the costs are variable, but some costs are considered as fixed since they are uncertain and the exact change in the cost due to the change in the output is not clear.
Treating uncertain costs as fixed seems to be more informative to management for decision making because management will be able to classify the costs into two and their levels to various outputs can also be observed. 2. What are examples of conflicting motivations that might lead well-meaning managers to undercut a stated pricing strategy? Pricing strategy depends on various factors such as costs, margin, profits expectations, competitor’s prices, customers’ attitude towards various price levels, etc.
Management may take different pricing strategies based on the marketing conditions, too. For instance, some companies go for skimming pricing strategy whereas others take penetration pricing. Kerin, Hartle and Berkowitz (2005, p. 195) argued that pricing too low or pricing too high can have dire consequences. Very often, management will be influenced by various market forces to undercut the price that has already been fixed. Competition is always a stronger market force that influences management in taking decisions related to various marketing functions. Pricing strategy is one of such areas.
A well-meaning and successful manager also may require to keep lower price, even though that is not profitable and it may even lead to loss, if the competitors have already kept their price low. In such cases, decreasing the price will be a better strategy than making huge loss due to which customer may fully avoid the goods or service it serves to them. Another important motivator is fashion. If there is major changes in the fashion, the manager may be prompted to undercut the price since he has to try to sell as much as possible before the fashion change causes huge financial loss in its business.
3. Who in the organization should have the right to make the pricing decision (e. g., sales, marketing, etc. )? Marketing manager is fully responsible for pricing in a business organization. Marketing department and, more significantly, marketing manager are responsible for assessing, analyzing and evaluating the four marketing mix elements and take proper decisions accordingly. The major four marketing mix elements are product, price, place and promotion. Marketing manager is required to integrate and coordinate these four marketing elements and thus, to take strategic decision related to any of these four elements. A small increase or decrease in the present price level can have significant impacts on its marketing results.
Similarly, decisions related to whether the organization should take skimming pricing or penetration pricing, or any other pricing strategy also can have significant impacts on the overall marketing results. Therefore, the marketing manager is to analyze all the relevant information related to marketing forces, customers, competitors, cost-volume and profit, etc. Marketing manager is not only responsible for taking pricing decisions, but also to evaluate and foresee all the consequences of the decision that marketing department takes. 4.
Why should only incremental costs be considered when evaluating pricing decisions? Incremental cost pricing takes a long term view of the costs. Strict marginal cost pricing has been found to lead to large price fluctuations when the capital is indivisible, the incremental cost pricing method offers a solution as a compromise between efficiency and price stability. It is regarded as a practical approach to the marginal cost pricing concept.
Incremental cost pricing is purely based on variable costs that are incurred during the production process, and the main advantages of incremental costing have been observed that the management will be bale to anticipate a certain amounts or percentage of profits from the sale. Incremental costing is considered as a basic tool that can help the management in taking most appropriate decisions and also to recognize accurate cost structures (Lucey and Lucey, 2002, p. 296). By using incremental costing method, the management will be able to attribute different costs to different cost centers and they can, thus, identify the cost and volume relationship.
This, in turn, helps them take more effective decisions. Identifying variable costs as variable and fixed as fixed is critically important to understand the detailed cost structure. When it comes to the marketing and management points of view, this is highly important to take proper decisions related to price, customers’ satisfaction of price and product, etc. . References Hilton, R.W. , Maher, M.W. , & Selto, F.H.
(2006). Cost management: Strategies for business decisions, Third Edition. McGraw Hill Companies Kerin, R.A. , Hartley, S.W. , & Berkowitz, E.N. (2005). Marketing, Eighth edition, The McGraw Hill Companies Lucey, T., & Lucey. T. (2002). Costing. Illustrated Sixth Edition. Cengage Learning EMEA