Premium Pricing Strategy

Premium Pricing Strategy

A pricing strategy is a way that is utilized to decide the best cost for an item or service. Estimating techniques help with picking costs that amplify additions and investor esteem while considering customer and the demand of the market. Estimating techniques consider huge numbers of the business factors, for example, income objectives, target clients, positioning of the brand, marketing objectives, and the uniqueness of the item. They can likewise be influenced by external components like pricing of the competitors, customer demand, and financial patterns. Some strategies which can be applied by SCB are discussed below.

Premium Pricing Strategy

It is a prestige pricing strategy which is adopted by companies to present their commodities as so worthy or luxurious. This strategy takes into consideration the value of the product and not necessarily the production cost or the actual value of the product. Premium estimation of prices is an immediate capacity of brand discernment and awareness. Brands who apply this estimating strategy are known for offering some incentive and status through their items, which is the reason they are evaluated higher than different competitors (Tellis 2006, p150). SCB can adopt this pricing strategy on the new product because the customers are willing to purchase this product because of its unique features. The company will be able to meet its minimum profit margin of 10% if they adopt this strategy because customers will prefer the new mountain bike over the bikes produced by their competitors. The disadvantage which SCB may encounter if they adopt this method is the high cost needed to set up and keep up a premium valuing technique that must be kept up for the entire period this system will be utilized. Otherwise, excellent brand acknowledgment by the customers stumble, and the organization may experience issues keeping up the price points.

Value-Based Pricing Strategy

A value-based estimation of price method is when the organizations set the prices of their products based on the value in which the clients are ready to pay for the item. They can even charge more so long as the consumers are ready to pay since they believe that the product is good enough to deserve such a price. This strategy can also boost consumer sentiment and faithfulness. It helps in prioritizing the customers in other sections of the business, like promotions and customer service. This strategy requires the company to always be checking on different client profiles and purchaser personas and conceivably shift the costs where your clients fluctuate (Popescu et al., 2007 p418). Value-based strategy is suitable for a company that is facing a decline in sales because of the external factors. This method is ideal for SBC because of the stiff competition they are facing from the big companies which are producing bikes. SCB can effectively use this method when setting the price of the new mountain bike to enable them to attain their target of a minimum profit margin of 10%. Customers will not care much about the cost of producing the bike because they will be getting the value of their money by purchasing it. The disadvantage which can be faced by SCB if they adopt this strategy is that the competitors will take away their market share by offering lower prices to the customers.

Cost Reduction

I agree with the team on some items which are proposed to be reduced, but I’m afraid I have to disagree with others like the indirect costs. Indirect costs should be maintained at £100 since it does not affect much the production of the new bike. The cost of delivery should be increased from £20 to £30 to ensure that the selling of the new bike is not affected by a lack of resources to deliver the orders to customers. Delivering the product to customers motivates them to always purchase from that company since they will receive them at a place of their convenience. Cutting down the cost of delivery means that the customer will be forced to pay for the product to reach them. Selling and distribution should also be maintained at £55 because the company is trying to reach more customers, which means that they will need to distribute the product to regions that are from the company. Warranty and support should also be maintained at £35 because this is the section that motivates customers and ensures better service delivery to customers. Customers who are well served will always be satisfied, and they will choose to come back again (Spence 2009, p114). I agree with the team to cut the cost of administration from £55 to £45 since the administration will not encounter any difficulty with the introduction of the new bike.

PART B

Activity-Based Costing

Introduction

The traditional costing method which has been used at SCB for some time is clearly not suitable for a company which is faced with competition from the companies which are already established in the market. Introducing the new method of costing will improve planning for the future of the company. It also helps in determining the exact costs of the overheads in the organization, which the traditional method is giving in a very general form. Activity-based method is also reasonable since it is accurate than the traditional method; it considers all the necessary factors into account. This method will help in reducing the price assumption of the traditional method in the ways discussed below.

Action-based costing (ABC) is a costing technique that assigns overhead and indirect expenses to related items and services, which gives SCB the ability to establish the expenses incurred in the production of each bicycle independently. This technique for costing recognizes the connection between costs, overhead exercises, and manufactured items, allocating indirect expenses to items less arbitrarily than the traditional method of costing. The two techniques gauge overhead costs identified with production and then assign these expenses to items according to a cost-driver rate (Babad et al., 2013, p567). The distinctions are in the exactness and complexity nature of the two techniques. Traditional costing is simpler and less correct than ABC and always assign overhead expenses to items dependent on an average discretionary rate. ABC is more mind-boggling and more exact than traditional costing. This technique assigns indirect expenses to activities first then assign to items depending on the items’ use of the activities exercises

Activity-based technique is more definite on the grounds that it considers significant factors before allotting an expense to an item. It comes up with unwavering quality item cost establishment by concentrating on circumstances and logistics, which are in connection to cost incurrence. It recognizes that it is actions that cause costs, not items, and it is an item that expends the activities. Therefore, for this reason, it is more time consuming and tedious. It is also progressively intensive and considers non-manufacturing costs also, for example, the cost of administration and managerial expenses. It builds comprehension of overheads and cost drivers; and makes expensive and makes the activities that do not add value to be recognized, permitting directors to eliminate or even reduce them. This situation is the reason why the company using this method will always be in a position to avoid unnecessary expenses in the level of production (Kaplan et al., 2003). ABC permits the challenge of working expenses to discover better methods for distributing and wiping out overheads. It also permits improved item and consumer productivity analysis. It promotes the techniques of performance management, for example, consistent improvement and scorecards. Traditional costing is a lot simpler method for deciding the expense of an item since it depends exclusively on allotting average overhead rates. This circumstance also implies that it will not generally be as exact on the grounds that it does not factor in non-manufacturing costs or figure out which overhead costs influence specific items

The recommendation of the accountant has to be taken seriously by the company because it will assist them in deciding on cost reduction. It will also help in pricing the brands since they will know which product has higher overheads, and they will be able to price them accordingly. Price distortions are revealed by the distorted depicted in the traditional method of cost distribution framework, where the volume of production drives every overhead expenses. In traditional cost framework, all overheads are treated as a unit-level expense. Unlike in the traditional system, the activity-based method enables the company to track the expenses of each activity and make a comparison with the target cost (Innes et al., 2000, p351). They will be in a position to make changes in cost allocation, which is specific to a particular activity. ABC also enables the company to treat every brand differently in terms of pricing since they can determine the cost incurred in producing each brand as opposed to the traditional method, which generalizes the overhead cost.

Conclusion

The activity-based method is the best method that the SCB ought to choose is the activity-based method because it is clear when it comes to overhead costs. It does not give general values of overheads that the traditional system provides. It will be a good decision if the company will adopt the activity-based method since they will be able to get accurate data, which is vital in the decision-making process. The activity-based method considers cost, which is not considered in a traditional method such as the managerial and administrative costs, which will significantly help in making decisions which concern the management of the company.