Organizations seek to
maximize profits as much as possible but face issues related to cost, value,
and competition. To project whether a business or product line will be
successful requires the ability to make accurate estimates of cost and profit.
The more accurately a company is able to narrow down the variable factors in
the environment the more likely they will succeed in their long-term
objectives. Having a cost strategy is a common way to estimate the perceived
value of products and services to customers.
The Cost Method,
Customer-Based Pricing Method, and the Competition-Based Pricing Method are
three viable pricing strategies. There are numerous other ways in which to find
the comparative value of a product but these three represent basic categorical
methods. Each has their own particular methodology and approach based upon
their general focus. Ultimately, the key is to ensure that the price reflects a
value others are willing to pay and still allow a firm to make a reasonable
profit.
The
Cost Method: The cost method
determines all of the costs that go into making or purchasing a product to
determine the potential value of that product. This includes both fixed and
variable costs to find the breakeven point and potential mark-up profits. It is
a method that ensures the firm has an opportunity to actually make a
profit. Construction costs are
estimated, merchandisers use product costs, and services use fixed mark-up
costs.
Customer-Based
Pricing: Customer-based
marketing focuses on ensuring that the product price fits well with demand. Economic
value estimation helps determine the value to customers in terms of close
competitors by comparing advantages and disadvantages to the purchaser. It is a
method of ensuring the maximum value through the perception of the customer’s
needs by looking at the value of the alternatives. For example, if a product
has a feature that the customer needs it has additional valuation to that
customer. It may not have the same value to other customers that don’t need
that feature.
Competition-Based
Pricing: Competition-based
pricing focuses on the price of competitor products to determine their own costs.
Some companies may compare their products to higher end products while others
may be working within the low price market (i.e. dollar store) arenas. They
seek to maintain competitiveness by ensuring customers see them as a viable
option in terms of price and value.
Within the construction
industry pricing strategies often use the cost method. When determine potential
costs and revenue it can be difficult to rely on one method alone. For example
a cost method may be balanced with a market based pricing strategy that looks
at contract value, owner characteristics, competitors, and market demand
(Mochtar & Arditi, 2001). This requires the ability research each of the
potential factors that determine the constructions costs and maximum values.
The method that an
organization uses today may not be the only method they may use in the future.
For example, when Wal-Mart moves into an area it can impact on the pricing
strategies other market competitors use (Ellickson, et. al, 2012). Large
retailers can change the competitive landscape of the market and other
retailers may need to adjust their approaches to stay competitive. Think of two
gas stations across the street from each other with one selling their fuel for $2.99/gallon
and the other $2.50/gallon.
It is important to
remember that using a single method may limit a firm’s ability to make accurate
market predictions. Some organizations
may seek to use multiple strategies or hybrid strategies too numerous to cover
within a single sitting. The purpose is to seek the products value, price, and
potential profitability from multiple vantage points in order to get the most
accurate perspective. Businesses use these methods to make thought out and
logical decisions that can increase their future revenue growth.
Ellickson, P., Misra,
S. and Nair, H. (2012). Repositioning dynamics and price strategy. Journal of Marketing Research, 49 (6).
Finch, J. (2012). Managerial
marketing. San Diego, CA: Bridgepoint Education, Inc.
Mochtar, K. &
Arditi, D. (2001). Pricing strategy in the US construction industry. Construction Management & Economics, 19
(4).
