Page 260 - DCOM302_MANAGEMENT_ACCOUNTING

Unit 13: Pricing Decisions

Total $9.70 Notes
Say that the labor is in short supply and is used for other product Y which generates a
contribution of $6 per unit and requires 2 hours of the same labor.
Material $2.50
Labor $6.00
Variable production overhead $2.50
Add:
Opportunity cost from labor scarcity:
$6/2 hours = $3.00 per hr × 2 hr = $6.00
Minimum price = $17.00

Caselet Product Pricing

ne of the tougher decisions that a marketing manager faces is how to price a product
in the market. In an existing market (i.e. where a new brand is being introduced
Oin a category that already sees competition) the decision is a little easier than in
a new market since the marketer can take some cues from the competition’s price ranges.
In this situation, the marketer has to be clear about the segment being addressed by the
new product. Once that is clear, he can choose from the following options:
1. Price the product on par with the competing product(s)
2. Price the product very close to the competing product(s)
3. Consciously price it quite a bit lower as an incentive to induce trial.
The third decision could prove counter-productive; a lower price could adversely affect the
brand value perception unless the communication strategy establishes a value-for-money
platform. The other danger is that it could prevent the brand from increasing the price even
later, i.e. consumers who came in at the lower price may migrate away when the price is
raised.
When launching a new product that is likely to create a new category altogether - as ready-
to-eat chapatti did a few years back - the pricing decision in even tougher. Here, there is
often no comparison point at all - the traditional method of making chapattis gives no
pointers whatsoever to what consumers may pay for the new product.
Therefore, the marketer has to debate various scenarios. Pricing it low might encourage
trials and good volumes, but the price may not prove viable in the long run. If priced too
high, it could inhibit trials, so the product could be a non-starter.

Nonetheless, given that there are a large number of affluent consumers who are ready to
spend, many marketers are in favour of pricing the product higher. It seems to be a given
that a high price does more to create a perception of brand value than almost any other
strategy.

As long as the boom in consumption sustains, this method would probably work well; if
the economic conditions were to see a downtrend, then, probably, such a strategy would
not work.
Unfortunately, market research does not help much in the area of pricing. Various pricing
research models have been generated and being from the MR industry I have done my
Contd...

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