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Question #2
a) What is target pricing? Under what specific circumstances can it be most useful? What are some potential problems with using this approach to pricing? Be specific in your responses.
b) What is cost-plus pricing? Under what specific circumstances can it be most useful? What are some potential problems with using this approach to pricing? Be specific in your responses.
c) What is life cycle pricing? Under what specific circumstances can it be most useful? What are some potential problems with using this approach to pricing? Be specific in your responses.
Expert Answer
As per policy, one question is allowed to answer. The problem contains three different questions. So, attempting and solving first two questions.
a) Target pricing is a approach which is market-based for the fixation of the product or service price. The producer of the product or the provider of the services ask the customers about the price there are willing to pay for the product or services. Through this approach, the company will able to know the maximum amount of cost they can spend on the product or service.
This approach is appropriate in the case of cost intensive. The availability of the “Value Engineering” is essential to reduce the cost, so that the target pricing is achieved. The customer is willing to pay the appropriate price.
The potential problems with the using the Target based pricing are : 1) Lackness of the cost reducing options. 2) Application of the value engineering in production of product or service. 3) Ability of the customer to pay for the product or service.
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b) Cost-plus pricing is an approach where the firm applies the cost of the production along-with the margin on the total cost to price the product or service. The customer has to pay the price on the basis of the total cost plus a “mark-up” on it. The cost involves the variable costs and the appropriate allocation of the fixed costs.
This Cost-plus pricing approach is most useful in the case : a) the firm can produce the product at least cost, b) the product or service is the only product provided by the firm, c) the customer accepts the price offered by the company for the product or service.
The potential problems related to cost-plus pricing are that a) under calculation of the cost, b) higher price due to over estimation or higher mark-ups on the cost, c) estimation of outside services costs, d) market competition is a limiting factor.
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