Question

Pricing decisions are often among the most important ones that an organization makes for its products or services. Firms have to consider many factors when making a pricing decision. Please identify the factors a firm might consider when pricing its product or service? What is target costing and pricing and how does it differ from traditional methods of pricing?

Answer 1

Price is regarded as very significant for the Marketers as it constitutes Marketers' appraisal of the worth consumers observe in the product or service provided and inclined to pay for the same product and service. Pricing is considered the most confusing element of the business as it creates many doubts while appointing a price for the product and services. Neither One doesn't want to price the products out of the market nor one wants to charge less than it's worth that leads to disorientation in selecting the priced value.

When starting over, certain factors for appropriate pricing should be considered:

Cost: Before choosing the price one should be financially informed and should calculate out the costs encompassed in the business including fixed costs, direct costs, etc.

Customers: Knowing customer's needs from the product, are they being driven by value or price, and the role played by price affecting their purchase decision. This information helps in setting the right targeted customers.

Positioning: Companies should know where they want to place themselves in the market. Someone wants to be luxurious, high-end brand, expensive, cheapest, or considering less 10% brand or something average. Once this is confirmed, ideal pricing can be achieved.

Competitors: There should be also some competitors snooping to know what price they are charging, level of product or service offered at those prices, position level of the competitors, and types of customers attracted to their price. Once these answers are acquired, a benchmark for an appropriate value can be set.

Profit: This is the most marginal segment considered by the business because one should know what profit they want to make. It should be observed what price others charge to reach a negotiable profit margin and this can help set the price ideally.

Target costing arrives at a permissible product cost initially by executing the market research through prediction of the market segment that is obliged to pay for the achievable product with determined features. Then the achievable profit margin set by the business is deducted by the predicted sales price to arrive at the highest target cost. This target is compared to the expected production costs. On the contrary, traditional manufacturers utilize cost-plus techniques for estimating the product price. They do market research for determining their market segment inclination and design of the product. Then the total cost of every component is summed up to arrive at the costs and the selling price.