Importance of Costs in Pricing Strategy

Importance of Costs in Pricing schemePrice of a product is a major element of the trade mix. Pricing is one of the virtually important strategic issue because it is related to the product positioning. The price goes in hand with the different marketing mix elements such as product promotion, channel decisions and its features.For a developing the pricing of a youthful product, there can be a general sequence of steps that can be followed by the placement which may vary from other organisations. The main argona of focus allow however be same for all the organisations. The contrasting steps can be as follows.Develop marketing outline perform marketing analysis, segmentation, targeting, and positioning.Make marketing mix decisions define the product, distribution, and promotional tactics.Estimate the demand curvature understand how quantity demanded varies with price.Calculate apostrophize include fixed and vari commensurate be associated with the product.Understand env ironmental factors evaluate likely competitor actions, understand legal constraints, etc.Set pricing objectives for example, profit maximization, tax maximization, or price stabilization.Determine pricing using education collected in the above steps, ask a pricing method, develop the pricing structure, and define discounts.The various pricing strategies for products include, competition ground pricing, indeterminate pricing, creaming or skimming, limit pricing, loss leader, market oriented pricing, penetration pricing, price discrimination, premium pricing, predatory pricing, constituent margin based pricing, psychological pricing, dynamic pricing, price leadership, target pricing, absorption pricing, high-low pricing, premium decoy pricing, borderline cost pricing, value based pricing. For each and every pricing strategies has its own reasons and market reach.At the remove of the assignment, we can observe the various methodologies and techniques an organisation adopts i n managing the finances using the pricing centric file of view.The factors that influence how a consumer perceives a tending(p) price and how price- in the buff a consumer is likely to be with respect to different purchase decisions1Reference Price topic Buyers price sensitivity for a given product increases the high the products price relative to perceived alternatives. Perceived alternatives can vary by purchaser segment, by occasion, and other factors.Difficult Comparison Effect Buyers ar slight sensitive to the price of a known / more(prenominal) reputable product when they have difficulty comparing it to potential alternatives.Switching Costs Effect The high the product-specific coronation a buyer must make to switch suppliers, the less price sensitive that buyer is when choosing between alternatives.Price-Quality Effect Buyers are less sensitive to price the more that higher(prenominal) prices signal higher quality. Products for which this effect is particularly rele vant include image products, exclusive products, and products with minimal cues for quality.Expenditure Effect Buyers are more price sensitive when the expense accounts for a large percentage of buyers available income or budget.End-Benefit Effect The effect refers to the relationship a given purchase has to a larger overall put on, and is divided into dickens parts Derived demand The more sensitive buyers are to the price of the end benefit, the more sensitive they will be to the prices of those products that contribute to that benefit. Price proportion cost The price proportion cost refers to the percent of the add together cost of the end benefit accounted for by a given component that helps to produce the end benefit (e.g., think CPU and PCs). The smaller the given components share of the total cost of the end benefit, the less sensitive buyers will be to the components price.Shared-cost Effect The smaller the portion of the purchase price buyers must pay for themselves, the less price sensitive they will be.Fairness Effect Buyers are more sensitive to the price of a product when the price is outside the range they perceive as fair or reasonable given the purchase context.The Framing Effect Buyers are more price sensitive when they perceive the price as a loss rather than a forgone gain, and they have greater price sensitivity when the price is remunerative separately rather than as part of a bundle.The Activity-based cost ( first rudiment)The Activity-based costing (ABC) is a type costing model that identifies activities in an organization which assigns the cost of each activity resource to all products and work accord to the unquestionable consumption by each. The main concept of this model is to assign more of the indirect cost into direct be. Indirect cost are costs that are not directly accountable to a cost object, such as a particular function or product. Indirect costs may be either fixed or variable. Indirect costs include taxes, administr ation, personnel and security costs, and are also known as overhead, which is nothing but the cost incurred for operating any kind of business.So in this costing model an organisation can precisely estimate the cost of individual products and services so they can identify and eliminate those that are unprofitable and lower the prices of those that are overpriced. In a business organization, the ABC methodology assigns an organizations resource costs through activities to the products and services provided to its customers. It is generally use as a tool for understanding product and customer cost and profitability. As such, ABC has predominantly been used to support strategic decisions such as pricing, outsourcing, identification and measurement of process modifyment initiatives.The different uses of the ABC model is as followsIt helps to identify inefficient products, departments and activitiesIt helps to allocate more resources on profitable products, departments and activitiesIt helps to control the costs at an individual level and on a departmental levelIt helps to find unnecessary costsIt helps fixing the price of a product or service scientificallyYes, the ABC model does has its limitations. thus far in activity-based costing, some overhead costs are difficult to assign to products and customers, such as the gaffer executives salary. These costs are termed business sustaining and are not assigned to products and customers because there is no meaningful method. This landsman of unallocated overhead costs must nevertheless be met by contributions from each of the products, but it is not as large as the overhead costs before ABC is employed.Although some may argue that costs untraceable to activities should be arbitrarily allocated to products, it is important to realize that the only purpose of ABC is to provide information to management. Therefore, there is no reason to assign any cost in an arbitrary manner.Be able to apply forecasting techniques to o btain information for decision makingApply forecasting techniques to make cost and revenue decisions in an organisationAssess the sources of funds available to an organisation for a specific nominateBe able to participate in the budgetary process of an organisationSelect appropriate budgetary targets for an organisationParticipate in the creation of a master budget for an organisationCompare actual expenditure and income to the master budget of an organisationEvaluate budgetary monitoring processes in an organisationBe able to recommend cost step-down and management processes for an organisationRecommend processes that could manage cost reduction in an organisationEvaluate the potential for the use of activity-based costingBe able to use financial appraisal techniques to make strategic investiture decisions for an organisationApply financial appraisal methods to analyse competing investment projects in the public and private sectorMake an justified strategic investment decision for an organisation using relevant financial informationReport on the appropriateness of a strategic investment decision using information from a post-audit appraisalBe able to interpret financial statements for preparedness and decision makingAnalyse financial statements to assess the financial viability of an organisationApply financial ratios to improve the quality of financial information in an organisations financial statementsMake recommendations on the strategic portfolio of an organisation based on its financial information