Pricing Strategies Price and Cost Variables Are

Pricing Strategies Price and cost variables are not fixed. At times, there are some fixed elements to these costs but in many instances these costs are subject to fluctuation. These fluctuations can derive from changes in buying power, changes in commodity prices and other considerations. Likewise, forces in the external environment can bring about changes in the prices the firm can charge. When uncertain variables are fixed, the company can find that margins do not hold as expected, which can compromise profit.

In addition, the price can be set on the basis of variables on the assumption that the costs are relatively fixed. When these costs provide not to be fixed, the price does not deliver a strong enough margin. The impacts of these types of decisions can be far-reaching. Firms can decide to enter markets that are not profitable, and make decisions with respect to their product line-ups on the basis of uncertain information.

The risk associated with the pricing decision increases significantly when there are uncertain variables in the costs and prices of a product. 2. There are a number of motivations that managers might have to undercut a stated pricing strategy. The most important class of motive lies with the external environment, in particular the relationship between price and demand for a given product (Goetz, 1985). A manager may see an opportunity in the marketplace and undercut the strategy in order to make short-term market share gains.

In addition, the strategy may be undercut in response to competitor movements, such as price cuts or discounts. The motivation to win market share often comes at the expense of pricing strategy. Managers may also react to a decrease in expected input costs. If a product becomes cheaper to produce, a manager might see this as an opportunity to increase market share by lowering the price, undermining a chosen pricing strategy. 3. Pricing decisions should be made by marketing, but with input from a number of different parts of the organization.

The reason is that there are two main levels on which the pricing decision is made -- the long-term strategic level and the short-term tactical level (Hurwich, no date). The pricing decision is made on the basis of a product's variable costs, the company's fixed costs, the competitive environment for the product and the expected shape of the demand curve. The marketing department has knowledge about the last two, but relies on the production department and the accounting department for the first two.

The CEO may also have input, if the product is sufficiently important to the firm's overall strategy. Finance, sales and other ancillary departments may also contribute to the decision, particularly at the short-term level when price changes will have less long-run impact on the company's strategy. The different departments may not all agree on the best price for a given product. It must be remembered, however, that the long-term pricing strategy must be consistent with the company's strategic objectives.

In the short run, the strategy should reflect the firm's short-term tactical objectives. It is the responsibility of production and sales to make the price desired work. This is because the market is typically the most important element in price-setting. Market structure in particular plays a significant role in price-setting, as the degree to which firms must react to the moves of competitors varies depending on the structure of a market (Coricelli & Horvath, 2008). 4. Incremental costs are those specifically associated with producing a given product or service.

In setting pricing strategy, only incremental costs should be considered when setting the price. While many firms consider an allocation of fixed costs in setting prices, these allocated fixed costs do not reflect anything to do with the cost of producing the good. Those fixed costs would be incurred regardless of whether or not the good is produced. The firm has control over the fixed costs, and can either increase or decrease them regardless of the product.

The use of only incremental costs is associated with neoclassical pricing strategy, and this strategy is not common in practice. More importantly, there are skeptics with respect to the validity of this pricing strategy (Lucas, 2001). While there is a case to be made that there is some correlation between total fixed costs and total output level, no logical connection has been made to consistently link full cost pricing to business success.

Indeed, any gap between neoclassical pricing strategy and lack of business success is more likely related to the gap between cost inputs and pricing in general -- the fact that external forces are a critical element in real world pricing strategy. All told, however, there is no logical case to be made for full cost pricing. Incremental costs directly reflect the.