{"id":100944,"date":"2022-08-18t13:00:47","date_gmt":"2022-08-18t17:00:47","guid":{"rendered":"\/\/www.g005e.com\/?p=100944"},"modified":"2024-08-14t09:30:11","modified_gmt":"2024-08-14t13:30:11","slug":"what-to-know-about-pricing-strategies","status":"publish","type":"post","link":"\/\/www.g005e.com\/2022\/08\/18\/what-to-know-about-pricing-strategies\/","title":{"rendered":"what we know about pricing strategies"},"content":{"rendered":"

\"price<\/a>where penetration comes in.<\/strong><\/p>\n

by august j. aquila<\/i><\/a><\/p>\n

pricing in the real world is much different than in the accounting profession. usually, wholesalers and retailers set their prices by using markups as the product moves through a distribution channel.<\/p>\n

more: <\/b>make the most of your marketing mix<\/a> | marketing orientation is what firms need<\/a> | when hourly billing hurts profits<\/a>
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producers or manufacturers usually set a list price. think of the manufacturer\u2019s suggested list price on the window of a new car. car dealers will use various methods to price the new vehicle. let\u2019s look at the most common pricing strategies that you may consider.
\n
\npricing on cost<\/strong><\/p>\n

cost-based pricing is a fairly straightforward concept, where the organization understands the operation costs of producing a given good and price that good as close to this cost level as possible. it is often referred to as cost-plus pricing, as the firm must retain some value or profit from the sale. this markup can be set at a fixed percentage, such as 5%. if a given good will cost $10 to develop, a perfect cost-based pricing would be to sell it at $10. a cost-plus pricing model at 5% would be to sell the product at $10.50.<\/p>\n

while the concept of cost-based pricing is quite simple, the accurate measurement of cost can sometimes be a bit complex. there are fixed costs, variable costs and indirect costs, which must all be factored into the overall calculation.<\/p>\n

each of these costs is impacted differently by volume, and, as a result, cost-based pricing may fluctuate over time. this creates some requirements for projecting volume, basing cost off of a certain volume and understanding the potential in variance.<\/p>\n

fixed cost changes over time, for the simple reason that each additional unit produced will lower the average cost per unit relative to fixed investments. take, for example, an investment in a machine for $10,000. the machine can produce 10,000 units in a year. at maximum capacity, this machine will cost $1 per unit. however, the demand is not high enough to produce at this capacity. instead, it is only producing 5,000 units a year. now the cost per unit is $2.<\/p>\n

the variable cost is consistent for each new unit, and as a result is not sensitive to overall volume. what this means is that producing one unit will cost $5, and producing 10 units will cost $50, 100 units $500. indeed, sensitivity to volume is often one of economy of scale, which is to say that purchasing inputs for production may even become cheaper the higher the quantity that is produced. as a result, variable costs and quantity have a very different relationship than fixed costs and quantity.<\/p>\n

impact of quantity on cost types<\/strong><\/p>\n

the simple chart below underlines the relationship between fixed, variable and total cost compared to quantity produced and\/or sold.<\/p>\n

\"diagram\"<\/a><\/strong><\/p>\n

indirect cost<\/strong><\/p>\n

complicating the concept of cost-based pricing is the indirect cost of doing business. many aspects of an organization are not directly related to production, and are therefore somewhat difficult to factor into the overall equation. salaries of corporate staff, administration costs, legal costs, office costs, utilities, electricity and other supports must be accurately projected and built into the cost-based pricing model in order to ensure that the organization is properly pricing the product for profitability.<\/p>\n

overall, when a company decides to price goods based on cost, it is important that the internal mechanisms of measurement for fixed, variable and indirect inputs are highly accurate and developed. this cost method is often considered a low-cost method, as the firm is attempting to forward as much value as possible to the consumer. this model is best for organizations working to compete on price, and striving for optimal efficiency in the production process.<\/p>\n

price leaders<\/strong><\/p>\n

there are price leaders in every market. they determine the going price for the product or service and all other competitors follow suit. the firms that are price leaders normally have an excellent understanding of their clients\u2019 wants and needs and are effective in providing high value.<\/p>\n

usually this strategy is successful when there are a small number of organizations and there are significant barriers to entry. unfortunately, this is not the typical accounting firm market, and hence, we don\u2019t see this type of pricing strategy in the accounting profession. rather, accounting firms continue to underprice each other.<\/p>\n

prestige pricing<\/strong><\/p>\n

some companies are able to develop a prestige pricing strategy. nike is a great example. the prices for its shoes are set higher than normal because its customers value the image of the brand and the features over those of its competitors.<\/p>\n

several years ago, volkswagen came out with a high-end vehicle that did not sell. the market considered volkswagen a manufacturer of low-end rather than high-end automobiles. the company had an image problem.<\/p>\n

blue-chip consulting firms, such as mckinsey & company, accenture, etc., often follow a prestige pricing strategy by setting their prices high to suggest a high quality or high status of their products. mercedes-benz and other luxury car manufacturers also use this strategy.<\/p>\n

watches can cost you as little as $40 or less or they can cost thousands of dollars. they all tell time, but the higher-cost watch is a status symbol. it shows that the individual wearing it has been financially successful. it\u2019s not the functionality of the watch, but what the brand stands for. the question here is \u201cwhat does your brand stand for?\u201d in any market there are go-to service firms that employ this strategy. do you know the ones in your market?<\/p>\n

bait and switch<\/strong><\/p>\n

this strategy is definitely not recommended for any firm.<\/p>\n

it is included because it is commonly used by retailers in developing their pricing strategies. this pricing strategy falls at the other end of the spectrum from prestige pricing.<\/p>\n

firms that employ this type of pricing strategy announce a very low price with the purpose of attracting customers.<\/p>\n

as the name implies, the firm does not intend to sell the product\/services at these artificially low prices, but rather to get the customer to purchase a higher-priced item or service. all you need to do is to check the local paper for audio and stereo equipment, tvs, automobiles, etc., for the \u201cspecial priced,\u201d limited availability items to get an idea of this type of pricing strategy. other examples include resorts that promote a low nightly fee and then charge a very high daily resort fee to the vacationer\u2019s bill.<\/p>\n

market penetration<\/strong><\/p>\n

this pricing strategy is normally used when a service provider or manufacturer wants to buy market share. to achieve a significant share of the market, the firm would price its services or goods at a very attractive price. some firms set their fees based on their marketing strategies. if, for example, a firm is trying to penetrate a market, it will be inclined to determine its fees based on the competitors in that particular market. for the most part, those firms that follow a penetration pricing strategy will tend to charge lower fees than their competition.<\/p>\n

during the last few years we have seen more of market penetration pricing in the accounting profession. firms that want to get into a new market will often significantly underprice their accounting and assurance services.<\/p>\n

there are times when low fees may be advisable, but they are based on a strategy and not just pricing. for example:<\/p>\n

the market appears to be highly sensitive to fee levels. therefore, a low fee will stimulate more rapid market growth.<\/p>\n