Theme: Analysis of the cost of the product and the factors influencing its change
Plans: Introduction The factors influencing pricing decisions and their analysis.
Different methods of pricing and their implementations.
Product cost analysis. Its principles and features.
Conclusion
Introduction In the current situation, economic analysis covers all aspects of the enterprise, allows you to effectively manage labor, material and financial resources, to identify internal reserves that are not used in economic activities. In a competitive economy, each enterprise must analyze its economic behavior and formulate its economic strategy and tactics based on the model of behavior of foreign market participants, buyers, suppliers, tax authorities and others. On the basis of economic analysis, each enterprise organizes business activities that allow it not only to survive in a competitive environment, but also to establish a profitable business, or sooner or later its competitors will take over the market and the enterprise will be forced to cease operations.
Therefore the product cost also recognized as one of the most important aspect of financial analysis. The costs involved in creating a product are called Product Costs. These costs include materials, labor, production supplies and factory overhead. The cost of the labor required to deliver a service to a customer is also considered a product cost. Product costs related to services should include things like compensation, payroll taxes and employee benefits.
The Cost Analysis refers to the measure of the cost – output relationship that the economists are concerned with determining the cost incurred in hiring the inputs and how well these can be re-arranged to increase the productivity of the firm. In other words, the cost analysis is concerned with determining money value of inputs called as the overall cost of production which helps in deciding the optimum level of production. The first thing you need to do is to define the scope and purpose of the project. Ask yourself why you need to do a cost analysis and what its purpose is. This will help you to determine the scope of the cost analysis. List the major questions that you want a cost analysis to answer. For example, if you are working on setting a budget for your company, the scope of your cost analysis would include the entire business. If you were deciding on the cost of a specific service, the scope of your cost analysis would focus on the part of the company it would involve or impact.
The factors influencing pricing decisions and their analysis.
Customers use price as an indicator of quality particularly for products where objective measurement of quality is not possible, such as drinks and perfumes. Price strongly influences quality perceptions of such products. If a product is priced higher, the instinctive judgement of the customer is that the quality of the product must be higher, unless he can objectively justify otherwise.
Some companies prefer to extend their product lines rather than reduce price of existing brands in face of price competition. They launch cut-price fighter brands to compete with low price rivals. This has an advantage of maintaining the image and profit margins of existing brands. By producing a range of brands at different price points, companies can cover varying price sensitivities of customers and encourage them to trade up to more expensive higher margin brands. The company should be able to justify the price it is charging especially if it is on the higher side. Consumer product companies have to send cues to the customers about the high quality and the superiority of the product. The superior finish, fine aesthetics or superior packaging can give positive cues to the customers when they cannot objectively measure the quality of the offering. The company should be aware of the features of the product that the customers can objectively evaluate and should ensure superior performance of those features. In industrial markets, the capability of salespeople to explain a high price to customers may allow them to charge higher prices. Where customers demand economic justifications of prices, the inability to produce cost arguments may mean that high price cannot be charged. The company should be able to anticipate reactions of competitors to its pricing policies and moves. Competitors can negate the advantages that a company might be hoping to make with its pricing policies. A company reduces its price to gain market share. One or more competitors can decide to match the cut, thwarting the ambitions of the company to garner market share. But all competitors are not the same and their approaches and reactions to pricing moves of the company are different.
The company has to take care while defining competition. The first level of competitors offer technically similar products. There is direct competition between brands who define their business and customers in similar way. Reactions of such competitors are very swift and the company will have to study each of its major competitors and find out their business objectives and cash positions. Competitors who have similar ambitions to increase their market share and have deep pockets will swiftly reduce price if any one of them reduces prices. A telephone company offering landline services has all telephone companies offering landline services as its first level of competitors. The second level of competition is dissimilar products serving the some problem in a similar way. Such competitors initial belief is that they are not being affected by the pricing moves of the company. But once it sinks into them that they are being affected adversely by the pricing moves of a company that seemingly belongs to another industry, they will take swift retaliatory actions. The telephone company has the mobile phone operators as its second level of competitor.
The factors affecting pricing decisions are varied and multiple. Basically, the prices of products and services are determined by the interplay of five factors, viz., demand and supply conditions, production and associated costs, competition, buyer’s bargaining power and the perceived value. We would like to divide them as Internal Factors and External Factors.
External Factors:
Total demand for product or service and its elasticity
Number of competing products or services
Quality of competing products or services
Current prices of competing products or services
Customer’s preferences for quality versus price
Sole source versus heavy competition (Number of suppliers in the market)
Seasonal demand or continual demand
Life of product or service
Economic and political climate and trends and likely changes in them in future.
Type of industry to which the product belongs and future outlook of the industry.
