Pricing Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Pricing Case Study Help

Alternate 1 (Cost plus Mark-up Pricing):

Cost plus mark-up pricing is the simplest alternative to determine the company’s newly developed product. It is the basic idea behind doing the business in the small household products. It provides the idea to make something for the customers and sell it above the cost that you have incurred to make these products, such as the cost for value added items. The mark up on cost is often used to get the target rate of return for businesses pertaining to their new launched products in the market.

However, the cost plus pricing such as the variable cost plus 200 percent mark-up on that, does not have a chance to become reality, because there isn’t any company that can calculate its exact cost nor do they have an arbitrary of margin to do anything to identify the willingness of customers for paying the price for that product. Cost plus pricing is the biggest pricing strategy in the small household product industry that is used by many businesses to compete with profitability in the market. It has many advantages and disadvantages, which are described and explained below.

The first and biggest advantage of cost plus pricing does not require a vast additional market research such as the customer’s willingness to pay, their intentions etc. Thus, these type of pricing strategies do not require much cost to expand for the development and introduction of new products in the market. In this case, the company will be well aware about the cost of production that are adding up in the businesses, through different types of material invoices, labour costs and factory overheads. The company will then sum up the all applied costs in order to find the cost per manufactured unit in order to find the contribution margin for the breakeven analysis. The purpose of finding the contribution margin is the identification of customers’ ability to pay for the new developed product. It is very simple, which is why this strategy is the most popular among the small businesses to manufacture the small household appliances.
Moreover, the cost plus mark-up pricing provides the full coverage of cost along with the consistent rate of return that helps the business to grow through expansions.
Cost plus pricing is helpful when either the company does not have enough knowledge about the customer’s willingness to pay for the product they have manufactured or they do not have direct competitors in the market, which will be helpful for the comparison in market prices and customers responses on those prices. The essential data available to find out the initial price offering for the product is cost of that product. That is why the cost plus pricing is used to calculate the estimated market price that customer will pay for that product, along with the constant contribution margin.
Apart from the advantages, there are several disadvantages for the company such as, in the case of price cutting strategies, the company might face the inefficiency in the process due to the guaranteed target rate of return which will not allow the company to go with price cutting techniques or in fact for the price differentiation strategies through the increasing profit abilities in the company.
In addition to this, it will create the culture of profit losing isolationism, which will not be able to provide any data about the customer to perceive their value.

Alternate 2 (Competitive Pricing):

The competitive oriented pricing also known as the market oriented pricing, which is based on the competition rather than the consideration of consumer demand and the company’s own cost.Cost plus pricing is the biggest pricing strategy in the small household product industry that is used by many businesses to compete with competitors in the market. It has many advantages and disadvantages, which are described and explained below:

It leaves money on the table. If you’re matching the competitor pricing, then you’re implicitly saying you’re not different than them, and you end up having to compete on price. You ignore everything else that makes up your firm’s value, such as fast turnaround time, seamless EDI integration, superior service, generous return policy, excellent technical support, etc. You’re not capturing the value for these positive attributes that you bring to the table. Moreover, you don’t understand what customers really value about you.
The devil is in the details. It is easy to fall under the rabbit hole when you get into the nitty-gritty of matching products to competitors. How do you match your private label to their national brand, or vice versa? What about if you have a different national brand than they do (such as Adidas vs. Nike)? What if you can’t match on a UPC or manufacturer part number? Do you need text-based machine learning for material descriptions to find matches? What if you have red and the competitor has blue? What if you charge for shipping as an extra line item, whereas the competitor bundles shipping into the price of the item? The point is that there is a lot that goes on below the surface when it comes to benchmarking competitor prices. Most of the times, the picture is not as clear as one would hope for it to be, not even after you answer all of those little questions.

Key Decision Indicators (KDI):

There are some key decision indicators (KDI) in which 2 represents the highest and 1 represents the lowest attributes for two pricing strategies.

KDI	Profitability	Contribution Margin	Break even	Units (Volume)	Total
Cost plus mark-up based pricing	1	1	1	2	5
Competitive oriented based pricing	2	2	2	1	7

Recommendations:

By using the key decision indicators (KDI), it has been recommended to the company, its presidents and senior executives to use the competitive oriented based pricing techniques, because it provides the highest profits, lowest break even in units (volumes) and highest contribution margin.

Implementation of Pricing Strategy:

Based on the analysis, as per the recommendation i.e. competitive pricing strategy;the implementation of the competitive pricing strategy mainly involves the analysis of the feasibility as the first step for the estimation of the success of the competitive pricing. This is primarily regarding the availability of the organizational assets, competencies and resources of the organization. The second step of the implementation process is about choosing an option that could be considered as a cross-functional effort for a significant contribution in legal, finance, operations, IT, sales and marketing. In order to do so, the customers’ feedback plays an important role as it significantly allows the business with the capability of continuous adjustment and reaction in any of the worst case, learning through failures and possibility of avoidance of future mistakes. Therefore, after the selection of the option, the other step that needs to betaken,involves the initiation of the project, its execution – determination of the right balance among the adjustment of prices and flexibility; monitoring and controlling, including better understanding of the performance of the strategic approach and its execution. Additionally, it is considered important for the achievement of good quality that the price needs to be controlled in the process of strategy execution rather than after the process completion..................................

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