Organizations seek to maximize profits as much as possible but face issues related to cost, value, and competition. To project whether a business or product line will be successful requires the ability to make accurate estimates of cost and profit. The more accurately a company is able to narrow down the variable factors in the environment the more likely they will succeed in their long-term objectives. Having a cost strategy is a common way to estimate the perceived value of products and services to customers.
The Cost Method, Customer-Based Pricing Method, and the Competition-Based Pricing Method are three viable pricing strategies. There are numerous other ways in which to find the comparative value of a product but these three represent basic categorical methods. Each has their own particular methodology and approach based upon their general focus. Ultimately, the key is to ensure that the price reflects a value others are willing to pay and still allow a firm to make a reasonable profit.
The Cost Method: The cost method determines all of the costs that go into making or purchasing a product to determine the potential value of that product. This includes both fixed and variable costs to find the breakeven point and potential mark-up profits. It is a method that ensures the firm has an opportunity to actually make a profit. Construction costs are estimated, merchandisers use product costs, and services use fixed mark-up costs.
Customer-Based Pricing: Customer-based marketing focuses on ensuring that the product price fits well with demand. Economic value estimation helps determine the value to customers in terms of close competitors by comparing advantages and disadvantages to the purchaser. It is a method of ensuring the maximum value through the perception of the customer’s needs by looking at the value of the alternatives. For example, if a product has a feature that the customer needs it has additional valuation to that customer. It may not have the same value to other customers that don’t need that feature.
Competition-Based Pricing: Competition-based pricing focuses on the price of competitor products to determine their own costs. Some companies may compare their products to higher end products while others may be working within the low price market (i.e. dollar store) arenas. They seek to maintain competitiveness by ensuring customers see them as a viable option in terms of price and value.
Within the construction industry pricing strategies often use the cost method. When determine potential costs and revenue it can be difficult to rely on one method alone. For example a cost method may be balanced with a market based pricing strategy that looks at contract value, owner characteristics, competitors, and market demand (Mochtar & Arditi, 2001). This requires the ability research each of the potential factors that determine the constructions costs and maximum values.
The method that an organization uses today may not be the only method they may use in the future. For example, when Wal-Mart moves into an area it can impact on the pricing strategies other market competitors use (Ellickson, et. al, 2012). Large retailers can change the competitive landscape of the market and other retailers may need to adjust their approaches to stay competitive. Think of two gas stations across the street from each other with one selling their fuel for $2.99/gallon and the other $2.50/gallon.
It is important to remember that using a single method may limit a firm’s ability to make accurate market predictions. Some organizations may seek to use multiple strategies or hybrid strategies too numerous to cover within a single sitting. The purpose is to seek the products value, price, and potential profitability from multiple vantage points in order to get the most accurate perspective. Businesses use these methods to make thought out and logical decisions that can increase their future revenue growth.
Ellickson, P., Misra, S. and Nair, H. (2012). Repositioning dynamics and price strategy. Journal of Marketing Research, 49 (6).
Finch, J. (2012). Managerial marketing. San Diego, CA: Bridgepoint Education, Inc.
Mochtar, K. & Arditi, D. (2001). Pricing strategy in the US construction industry. Construction Management & Economics, 19 (4).