Product Analysis Pricing
Product Analysis Pricing
In an attempt to find a new approach to the problem of pricing for companies possessing wide product ranges and a high proportion of short-run production, a new system, known as Product Analysis Pricing, was developed some years ago by the Glacier Metal Company. Whereas, in traditional costing methods, an analysis is carried out of materials and labour, P.A.P. examines the finished product. It attempts to equate the market value of the product with its main properties.
For companies like Glacier Metal, making a large variety of products of a non-standard nature, it is obvious that pricing must be a delegated function. A means must be found of meeting two essential needs: (1) that those to whom pricing is delegated are implementing the management's policy, and (2) that the prices quoted are market-oriented.
The difficulty with cost-based pricing is that it is production-oriented: yet the manufacturer's costing system means nothing to the buyer. In a market where he has a choice of suppliers, he has no interest in the fact that the firm with whom he is dealing finds certain processes easier and therefore cheapewe to perform than others. He literally could not care less that, because it has involved itself in fixed-price purchasing contracts, the same firm finds that it is paying too much for certain raw materials. The value of the product to the buyer does not vary with the vagaries of his supplier's costing system. The fact that his supplier has a particular costs situation does not give the buyer grounds for paying more. He will pay only for what is of benefit to him. He will not pay for anything which is not of benefit to him.
P.A.P. endeavours to recognize this fact by relating the price directly to those properties of the product for which the buyer is prepared to pay. The first question it asks, therefore, is how much value does the market put upon each of the properties of the product?
The procedure which is followed in Product Analysis Pricing is that the senior management of the firm establishes, initially, the significant properties of the product and sets sample target prices. A basic formula is then prepared by a pricing analyst. Management also prescribes policies which take account of competition and other variable commercial factors. Pricing standards personnel are responsible for ad hoc pricing which they do by analysing the properties of the product, applying the prescribed formula and either adding or subtracting what is called the 'market percentage', which is the set policy covering the commercial factors of the market situation. Account is then taken of certain variable calculations based on the current cost of materials and components and also of variations in order quantity. The resultant calculation which is passed to the sales division is capable of final adjustment within a discretionary limit allowed to the Sales Manager.
At first glance, the procedure appears complicated. Certainly, extensive preparation is involved at the outset. Once in operation, however, the P.A.P. method has been found relatively simple.
The advantages of this system are:
(1) Quotations can be provided promptly.
(2) Consultation with production staff is eliminated due to the separation of the pricing system from operating costs.
(3) The technical description of the product is the basis upon which the price is determined.
(4) The Sales Department can use discretion by adjusting the price in the light of market conditions.
The main disadvantages are:
(1) Failure to link pricing with operating costs.
(2) Danger of over-emphasis upon the initial judgements by which the properties of the product have been evaluated.
It is claimed for Product Analysis Pricing that the system meets the need for both stability and flexibility. The value of the basic properties of the product can be identified always within the total sales price, which ensures a degree of stability, whereas flexibility is obtained by means of the discretion which the system allows both to the senior management, in setting property values, and to the Sales Department to make a final adjustment to the price quoted to the customer.
Pricing methods, like so many other aspects of business practice, are today undergoing constant reappraisal. P.A.P. may not be the complete answer, but the kind of thinking from which it has been developed is very much in harmony with modern ONLINE MARKETING concepts.
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