Question

Strategic Cost Management

1. “Beautiful Masks“is a start-up manufacturing designer masks for men and women set up in April’ 20 post COVID.

It is managed by Ms Meher. She is facing a huge demand for her designer masks from Retail outlets and on their online store as well. She wants to understand the correct approach for pricing the masks. She has appointed you as the management accountant.

Please advise her regarding the key factors affecting pricing decisions, both internal and external.

Also, suggest any 3 types of pricing methods she can choose from highlighting 2 salient features of each method.

The answer should be a min of 1000 words. And in the word format

Answer 1

Internal Factors Affect Pricing Decision

Some of the internal factors that affect the price decision of the company are as follows;

1.Company’s Management

When it comes to setting the price of the product, then it involves two parties; the marketing team and production staff. However, the marketing team comprises of company’s management, top executives, and marketing staff. They consider how the product would play out in the market.

One the other hand, the production team considers the production costs and product strategies. Usually, the final price considers both the views of the product and marketing teams.

2.Marketing Mix Strategy

Marketing mix means product, price, promotion, and place. Some marketing experts view price is the only dominant factor in the mix because a slight change in price can affect the promotion and distribution of the product at different places. Some companies lower the prices as a part of their marketing strategy to attract the attention of the price-conscious market.

While other companies increase the prices as a part of their marketing strategy. It doesn’t matter whether the company/business lowers the prices or increase it. The price strategy would only succeed if it follows the overall marketing objectives of the company. If a brand raises the prices, then it should add some more features and start a new marketing campaign.  

3.Different Characteristics

Characteristics of the product are the key to the price decision of the company because different characteristics of the product in terms of shape, color, size, packaging, etc. attract the attention of the customers. Customers are willing to pay more if they like and value the characteristics of the product. It could be a new style, feature, or anything out of the ordinary.

4.Costs

The cost of the product is the most important factor among all because it provides the basis to set the price. Of course, the management has to consider the product’s demand and the prices of the competitors as well. Finally, the management also considers the customers’ ability to pay the price, because it would be useless to avoid customers in the price decision.

5.The Overall Objective of the Company

A company may have various objectives. It could be profit generation, increasing market share, the company’s value-oriented, increasing or decreasing customers’ volume, maintaining a stable price and the company’s brand image, etc. Therefore, the final price decision also matches with the overall objectives of the company.

External Factors Affecting Pricing Decision

Some of the external factors that affect pricing decision of the company/business are as follows;

1.Demand in the Market

The demand for the company’s product in the market also plays a huge role because it tells us about the competitors, size of the market, and customers’ preferences and their ability to pay the price.

Sometimes, a company charges different prices to customers in different markets. The purpose is to check the results that how the market is behaving at different pricing strategies. If the demand for the company’s certain product is higher, then the price would be higher. If the demand is lower, then the company would lower its prices than competitors to compete in the market.

2.Competitors

Market competition is a very significant factor and it affects the price strategy. A firm may set high or low prices depending upon the competitor’s prices and product quality. If the company’s products are better than competitors, then the price would be higher. Otherwise, the business would set lower prices.

3.Company’s Suppliers

Suppliers provide the raw material to the company from which the business manufactures the final product. If the suppliers raise the prices, then the company has no choice but to increase the prices and pass it on to the customers.

If a company is making more profit on a certain product. When the suppliers see it, they would raise the prices of the raw material because they want to have a portion of the profit as well. However, it also depends on the abundance and scarcity of the product’s raw material.

4.The Economy of the Country

If the economy of the country is prosperous where people are employed and earning high salaries, then raising prices wouldn’t be a problem. In such an environment, customers are willing to pay more. However, when the economy of a country is in a recession, where people have limited sources of income. Businesses and companies have to set low prices to meet the customers’ ability to pay.

5.Customers

We have been talking about the customers’ ability to pay. It’s very important to consider the nature and behavior of the target market. Some customers are price conscious and the others are quality conscious. Therefore, you should know the nature of your target market.

5.Local Government

Sometimes the government controls the prices of certain products by introducing some laws. The purpose is to control inflation so that the prices shouldn’t go higher at a certain point. Therefore, the company has to consider the local laws of the government as well.

Conclusion

We have studied how some internal and external factors affect pricing decision of the company. A company may have control over its internal factors. But the external factors out of the control of the company, or it may have a little control over them.

Types of pricing Method

1. Premium Pricing:

A ‘premium strategy’ uses a high price, but gives good product/service in exchange. It is fair to customers, and more importantly, customers see it as fair. This could include food bought from marks & spencer, or designer clothes, or a jaguar car. We should remember that customers for consumer goods are often amateurs.

2. Price Skimming:

Customers won’t pay it they don’t think they are getting value. However there are times when high prices and large margins are appropriate. It is certainly easier to reduce prices than to sales them. A policy of ‘price skimming’ is often used for products at the introductory stage. Here the price is initially pitched high, which gives a good early cash flow to offset high development costs.

If the product is new, and competition has not appeared, then customers might well pay a premium to acquire a product which is offering excellent features.

3. Demand Oriented Pricing:

The importance of demand cannot be ignored while taking pricing decisions. Under this pricing strategy the pricing is decided by the intensity of demand and the consumer’s perception of the product price. Under this strategy there are two methods of pricing.

They are:

a. Perceived Value Pricing and

b. Demand Differential Pricing.

a. Perceived Value Pricing:

Perceived value pricing is based on the perceived value of the product and this is done with product positioning with the target market. The company decides the price of the product keeping the perceived value of the product by consumer’s in mind.

b. Demand Differential Pricing:

This is another method of demand oriented pricing called the price discrimination method, in which a product or service is sold at two or more prices that do not reflect a proportional difference in marginal cost.