Introduction
The pricing strategy should be an integral part of decisions in the marketing position, and it should depend on the overall development strategy of the business and marketing plans. Therefore, companies should not set one price but a pricing structure that should reflect on the variations in geographical demand, costs, the timing of purchase, requirement of market segments, order levels, the frequency of delivery, and service of contracts.
Why different pricing strategies are appropriate in some circumstances
Pricing is an important managerial decision, and most firms do not encounter pricing decisions in major ways on daily operations (Weygandt, Kimmel and Kieso, 2009, pp.59). However, there is a need to adhere to some additional guidelines in the pricing of the new products. Similarly, pricing of the products poses some difficulties in any company because some goods do not have past information. Therefore, the adoption of different pricing policies will enable a company to be in a position to determine the reaction of the consumers.
When adopting pricing policies, the decision becomes the major issue because when a company introduces its products, the entire future will rely on the soundness of the previous pricing decisions. Therefore, different pricing policies enable the company to establish specific criteria for accepting new products especially in a multidivisional firm where all different kinds of projects bubble up as favorites of several managers. Similarly, since there are always business rivals who would always like to use the same pricing policies, different pricing policies will assist the company in assuming some special decisions especially when one or more competitors are likely to change the price of their products. In some scenarios, competitors may introduce new products without price alteration of the existing products and if these new products are perceived to compete effectively with other products, the affected firm must think about its pricing strategies and the adoption of different pricing policies will solve the issue.
The use of different pricing strategies enables companies to consider price and cost relationship of their products (Drury, 2008, p. 259). Since cost condition determines pricing policies, it should be made correctly. Although a company needs to recover the common costs, it is unnecessary that the pricing of every product should be high to cover the apportioned share of the common costs. Consequently, different pricing policies require that the prices will cover the incremental cost of producing each product. The incremental costs are the additional costs that are not incurred if the good is not produced. As long as the price of the products is more than the incremental costs, the company will increase its total proceeds through the supply of the products. Therefore, different pricing policies are based on the evaluation of the incremental costs and a price with a maximum contribution of the costs will be acceptable.
Hospitality Furniture Ltd.
The marginal cost pricing is the act of setting the value of the product above the variable cost of producing it (Conkling, 2015, pp.160-161). However, this approach relates to short run situations for price setting. Moreover, the situation normally arises when a firm has a limited amount of the remaining unused capacity of production available for use. Additionally, marginal cost prices also arise if the company is not able to sell its products at higher prices. According to the case study, Hospitality Furniture Ltd is financially healthy. Therefore, it would like to maximize its profitability with its few units of sales. Similarly, the case study also illustrates that the company can achieve its sales through other means. In either of the scenarios, the sales of this company have the intention to be on an incremental basis. That is marginal cost pricing have no intention for the long run pricing policy because low prices is not expected to balance the fixed cost of the company. The employment of cost pricing strategy in Hospital Furniture Ltd is essential because its variable cost of its products is in the direct materials. Lastly, if the customers of the company can buy the furniture at a strong margin, it is sensible to use this type of pricing policy to sell the furniture on the ongoing market.
Concerning the pricing strategy of Hospital Furniture Company, the marginal costing system adds profits because its customers will be sensitive to the prices of the furniture. Similarly, the customers of the company will not purchase from other companies unless they are ready to engage the marginal cost pricing policy. Due to different pricing policies, Hospital Furniture will earn some incremental proceeds from its customers. If a firm is ready to undergo profits in the short run, it can adopt marginal cost pricing to gain the market entry. Furthermore, this strategy is more likely to get more price sensitive customers.
Home Furniture Ltd.
The markup to full cost is the short pricing method of the products (Boyes, 2011, p.255). It implies that in addition to a given percentage of the costs as proceeds to the production cost to reach the required price. This pricing strategy is appropriate for Home Furniture Ltd since the price of its furniture should cover the cost to generate the returns as an investment at a markup percentage. Therefore, this pricing policy helps the Home Furniture to determine the appropriate markup and careful evaluation of its cost, the elasticity of demand, and the level of competition facing the products. Moreover, the strategy enables the company to consider the brand image and long run policies in fixing the markup.
The use of different pricing policies such as the markup to full cost is essential in some instances. For example, the Home Furniture can work out some ways of producing the products for the cost price through reduction of the expenses. Therefore, the forecasted cost will be on the actual expenses for the pricing period. For instance, if the furniture is planned to be introduced in the market for four months, Home Furniture Ltd have to arrive at the cost of producing a single unit at the present value. Consequently, the values of various components of the products will be projected for the next four months to get the expected cost.
In conclusion, the markup to full cost policy is not suitable for all products and services because, in some instances, factoring of all relevant costs can price a company out of the market (Drury, 2013, p.299). In such scenarios, a company will try to adjust its distribution costs, input costs, increase the price of the products, and introduce additional services while finding other ways of keeping the costs at low levels. Additionally, different pricing policies will determine the target price based on the present value of the product in the market and the desired proceeds will be considered off the target of the selling price to arrive at the cost price.
References
Boyes, W. (2011). Managerial Economics: Markets and the Firm. 2nd ed. Cengage Learning.
Conkling, R. (2015). Marginal Cost in the New Economy: A Proposal for a Uniform Approach to Policy Evaluations. Routledge.
Drury, C. (2008). Management and Cost Accounting. Cengage Learning EMEA.
Drury, C. (2013). MANAGEMENT AND COST ACCOUNTING. 3rd ed. Springer.
Weygandt, J., Kimmel, P. and Kieso, D. (2009). Managerial Accounting: Tools for Business Decision Making. 5th ed. John Wiley & Sons.
