What Should Companies Consider When Determining The Degree Of Decentralization Designing Product Pricing Strategies, Part 2

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Designing Product Pricing Strategies, Part 2

A proposed conceptual framework

Five years after the publication of the theoretical framework that established pricing strategy, we now propose a new conceptual framework that will accommodate advances or new approaches resulting from the study of product pricing. This will be detailed on the following pages.

3 Cs

cost function

In its simplest definition, cost should be about the bottom line or the costs involved in producing and delivering a product and service offering. By knowing the costs, the marketer will be able to identify options or alternatives that can be used to control these costs. But there’s actually a lot more to the interested marketer.

Successful companies are more oriented towards long-term planning. The more long-term direction, the more proactive companies become. These activities increase costs. Tracking competitors’ activities, monitoring costs and profits, and revenue forecasting have a significant relationship with pre-tax profit. But there is evidence that costs do not increase proportionately with increased activity. Knowledge of the consequences of any activity will reduce the chances of misguided efforts, wasted resources, and financial losses. And it is for these reasons that guesswork and rules are discouraged.

Cost accounting is used to accurately consider all cost factors, to identify and separate the cost of production of goods and services. Costs include direct materials, direct labor, and overhead. And overhead costs include all indirect supplies and indirect costs of materials, managerial, transportation, clerical salaries, machinery operating costs, building depreciation, insurance, utilities, and employee benefits.

There are two approaches to costing: job and process costing. In job costing, each job is assigned the status of a cost center and materials and labor are charged directly to the manufactured item. In process costing, costs are accumulated and spread over all units produced.

Costs are not incurred due to organization processes. It is the result of the organization’s desire to satisfy both explicit and implicit needs. A salesperson must build relationships to understand the buyer’s needs, especially the most implicit requirements. This will lead to increased profitability as customers are able to be served differently.

Customers can be directly involved in marketing and supply chain contexts. Meanwhile, there are several dimensions of variation in customer profitability models. In the supply chain context, purchasing by the distributor, carrying costs and shipment costs generally vary throughout the supply chain; Customer characteristics such as size, decentralization of purchasing, inventory holding have a significant impact on customer service costs; And, order execution and associated costs vary by order type and size.

All manufacturers, retailers, and service providers also face inventory mismatch problems. It has important implications in marketing because many managerial decisions such as purchasing the right raw materials, pricing products, hiring the best workers, and scheduling efficient production are based on current inventory levels. These may include unrecorded scrap, misreported labor and product numbers, unrecorded engineering changes, replacement materials, and incorrect cost standards. Add in shipping errors, improper material usage, obsolescence, and unreported internal usage, and the costs can be really high.

And finally, the “financial leverage” factor, in which the use of externally borrowed funds and finding cheaper sources of funds also reduces costs.

These costs can have a negative impact on profits, leading to a tendency to raise prices excessively.

Customer demand schedule

In this regard, factors affecting customer profitability are volume, cost/gross margin, complexity factor and efficiency factor. Customer sales are positively related to total service cost as customer profit margin. When price differences adjust for differences in service costs to customers, gross margins are likely to be positive. Customer characteristics such as number of orders, number of items, degree of customization of product mix, number of distribution locations can lead to high service costs and reduced customer profitability. Higher levels of efficiency generate lower customer costs and higher customer profits.

Competitors’ pricing, pricing and offerings

Initially, or before calculating and setting the actual price, and without further calculation, the marketer may choose to: (1) sell at a premium, (2) sell at the going rate, and (3) sell at a discount. The direction depends on the influences that the marketer determines are appropriate for the company’s market.

Benchmarking can help evaluate costs to improve profitability, ensure return on investment, and evaluate cost effectiveness. Computing contribution margins also play an important factor in analysis and strategy formulation as a basis for marketing strategies in markets with price and elastic demand, along with pricing products and/or services relative to the relative price of substitute products. This can be used to evaluate incremental sales.

In the next article, we will discuss the practical application of pricing methods and adaptation strategies followed on the retail floor.

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