Pricing Strategies for SCB company

Pricing Strategies for SCB company

A pricing strategy is a method which is used to determine the best price for a product or service. Pricing strategies assist in choosing prices that maximize gains and shareholder value while considering consumer and market demand. Pricing strategies consider many of the business factors, such as revenue goals, target customers, brand positioning, marketing objectives, and the uniqueness of the product. They can also be affected by external factors like pricing of the competitors, customer demand, and economic trends. Some of the pricing 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 products as high-value or luxurious. Prestige pricing takes into consideration the perceived value of their product and not necessarily the production cost or the actual value of the product. Premium pricing is a direct function of brand perception and awareness. Brands who apply this pricing method are known for providing value and status through their products, which is why they are priced higher than other 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 establish and maintain a premium pricing strategy which must be maintained for the period this strategy will be used. Otherwise, the premium brand recognition by the customers stumble, and the company may have difficulty maintaining the price points

Value-Based Pricing Strategy

A value-based pricing strategy is when the organizations set prices of their products based on the value in which the customers are willing to pay for a product. They can even charge more so long as the customers are willing to pay because they believe that the product is good enough to deserve such a price. This strategy can also boost customer sentiment and loyalty. It also helps in prioritizing the customers in other facets of the business like marketing and service. This strategy also requires the company always to vary the prices where your customers vary (Popescu et al., 2007 p418). The value-based approach is suitable for a company which 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 disagree on 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 selling of the new bike is not affected by the 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 which are from the company. Warranty and support should also be maintained at 35 because this is the section which 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

Traditional costing method which has been used at SCB for a long time is not suitable for a company which is faced with competition from the companies 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 costing is also reasonable because it is more 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 system in the ways discussed below.

Activity-based costing (ABC) is a costing method that assigns overhead and indirect costs to related products and services, which enable SCB to determine these costs of each bike separately. This accounting method of costing recognizes the relationship between prices, overhead activities, and manufactured products, assigning indirect costs to products less arbitrarily than traditional costing methods. Both ways estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate (Babad et al., 2013, p567). The differences are in the accuracy and complexity of the two methods. Traditional costing is more simplistic and less accurate than ABC and typically assigns overhead costs to products based on an arbitrary average rate. ABC is more complex and more precise than traditional costing. This method first assigns indirect costs to activities and then assigns the costs to products based on the products’ usage of the activities.

Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product. It brings reliability in product cost determination by focusing on cause and effect relationship in the cost incurrence. It recognizes that it is activities which cause costs, not products, and it is a product which consumes activities. However, for this same reason, it is a bit more complicated and time-consuming. It is also more thorough and considers non-manufacturing expenses as well, such as administrative and managerial costs. It increases understanding of overheads and cost drivers; and makes costly and non-value adding activities more visible, allowing managers to reduce or eliminate them. This 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 enables effective challenge of operating costs to find better ways of allocating and eliminating overheads. It also allows for improved product and customer profitability analysis. It supports performance management techniques, such as continuous improvement and scorecards. Traditional costing is a much easier way of determining the cost of a product since it relies solely on assigning average overhead rates. This also means it won’t always be as accurate because it doesn’t factor in nonmanufacturing expenses or determine which overhead costs affect specific products.

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 faulty assumption underlying the traditional cost allocation system where all overhead costs are driven by production volume. In traditional cost system, all overheads are treated as a unit-level cost. Unlike in traditional costing system, activity-based costing enables the company to track the cost of each activity and make a comparison with the expected 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 a traditional method which generalizes the overhead cost.

Conclusion

The activity-based method is the best method which 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 which the traditional system provides. It will be the right 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 approach considers cost, which is not found 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.

 

References

 

Babad, Y.M. and Balachandran, B.V., 2013. Cost driver optimization in activity-based costing. Accounting review, pp.563-575.

Innes, J., Mitchell, F. and Sinclair, D., 2000. Activity-based costing in the UK’s largest companies: a comparison of 1994 and 1999 survey results. Management accounting research, 11(3), pp.349-362.

Kaplan, R.S. and Anderson, S.R., 2003. Time-driven activity-based costing. Available at SSRN 485443.

Popescu, I. and Wu, Y., 2007. Dynamic pricing strategies with reference effects. Operations research, 55(3), pp.413-429.

Spence, M., 2009. Cost reduction, competition, and industry performance. Econometrica: Journal of the Econometric Society, pp.101-121.

Tellis, G.J., 2006. Beyond the many faces of price: an integration of pricing strategies. Journal of marketing, 50(4), pp.146-160.