COSTING & PRICING STRATEGIC RELATIONSHIP

Costing and Pricing - Relational Essentiality



Costing and Pricing - Relational Essentiality

Introduction Cost and pricing have a sound relationship in deciding an effective pricing strategy that an organization tends to develop and execute. Cost is supposed to be one of the eminent price-drivers. Price is information about the company. It is the one, directly communicated to the consumers. Producers set prices according to the costs they have spent to produce and deliver it to the final consumer and earn some threshold of profit over it. Such a strategy is commonly known as “cost-plus pricing”. The report contains a discussion about the essentiality of cost & costing systems in order to devise and implement a profitable pricing strategy. It also covers the potential ways to design or enhance an organization's current costing system.

DiscussionAffect of Costs in Pricing Strategy Cost, as per definition given by accountants, is a resource forgone in order to achieve a particular object (Horngren et. al, 2010, pp. 27). Price is what customers is willing to pay in order avail the use of product & services (Kotler et. al, 2012, pp. 290). Prices are important to the both i.e. customers & sellers. The customers tend to gauge the product value by comparing the price paid for it and the utility or value obtained by availing a product or service. Sellers are more concerned about the pricing decisions because the price of their offerings has a direct impact on the firm's value, its market share and profitability (Kotler et. al, 2012, pp. 290). Price is a function of demand and supply (Horngren et. al, 2010, pp. 433). Pricing decisions are influenced by the three major factors i.e. customers, competitors and costs. Costs are important in influencing the pricing decision in a way that higher the price, lower the incentives a firm can enjoy and therefore, hampering the producing capability of the firm. The higher is the acquisition, process and delivery channel costs, the lower is the ability of the firm to produce much because of limited resources availability. Such higher costs influence the price of the market offerings of that firm by augmenting it break-even point. Companies therefore need to operate efficiently in order to be cost-effective and to tap in the market potential. Prices tend to behave differently in various market structures. The costs of acquisition have direct implication on the potential term for which the prices of the final product or service is fixed. In perfect competition, prices are determined by the customers hence giving the producer or service provider a less discretion in determining the price. However, opposite to perfect competition i.e. in monopoly, the producer can charge a much higher price than what costs it might have incurred to produce such good. In short-run, prices are opportunistic i.e. if the competition is higher and the demand is weak, the prices tend to be low and vice versa. But it is not the case always. Companies have to decide prices for long-term ...