Question:
Discuss about the Product Pricing and Demo Relationship.
Product costing is a method used to determine the cost of production per unit or service by use of every resource that was engaged in the process while product pricing is the method by which the business owner or a manufacturer determines the value at a customer is to buy a given a product or service (Mat & Smith,2014 ). Cost, therefore is the expense met to by a manufacturer to bring a product to the market for the buyer and price is the amount paid by the customer for a product or service, and the difference between the amount paid for products and total expenses incurred during production is the profit. When determining cost, a business must sum all the costs of inputs that are essential to produce a given item. When setting the price, an entrepreneur must consider all the costs that were involved in a given production but customer finally limits the price by way of boycotting buying the product until the value drops to meet customer’s value going by the standard of living (Luna-Reyes, Zhang, Whitmore, Jarman, Picazo Andersen & Andersen, 2014).
Product costing and pricing have evolved since from the inception of industrialization when mass production was the order of doing business and taken effect toward the second half of 20th century (Racz-Akacosi, 2017). Corporate profitability is only possible if all the inputs are keenly tracked from the beginning to the end of a production. From this perspective, entrepreneurs started assigning certain appropriate percentages to the expenses and other additional expenses like transportation, packaging, branding warehousing and advertisements till when customer is reached to buy the product. In-depth data from such analytical sources have prompted manufacturers to adopt routine product costing that provides feedbacks (Prasad, Venkatesh & Mahajan, 2015). The management is, therefore, enabled to focus on perfect workflow for purchasing tools which in turn is instrumental in setting exact prices for the produce.
Today, in modern business, product costing and pricing is so important that it greatly affects the survival of business in the market. Without product costing and pricing, no business can stand the dynamics of production and get its products to the customers at a profit. In short, it is indispensable if any business is to make profit from a given production. For instance, in Japan, manufacturers have embraced different modern styles of costing and pricing so as to fit in the market as evaluated below;
A state of deflation coupled with almost no rules and regulations, and stiff competition h had serious market impact on the Japanese manufacturing companies. The old-style of reducing prices by Japanese companies so as to gain the lion’s share in the market is long forgotten moreover, the usual practice of having additional mark-up to cater for manufacturing cost no longer functions for the companies (Entrop, Fischer, McKenzie, Wilkens & Winkler, 2016). Home prices however, are getting determined by customer demand i.e. what the customer is able and willing to buy at going price depends on what the market has. Economic stand-still witnessed in Japan and the numerous aging populace with low income have greatly reduced a common Japanese consumer’s income. According to Fullerton, Kennedy & Widener (2014), posits that technology has also worked against the Japanese manufacturers; development of online market platforms has propelled online purchases leading to price sensitivity and awareness among the consumers e.g. Amazon and Rakutenchi
The above economic and technological challenges has driven the Japanese manufacturers away from the traditional costing and pricing of products. In order to attract customers to their products, the manufacturers have had to look for other ways of doing it like making their products more appealing to the customers through packaging and branding. Offering after-sales services like extended warranties exited customers to buy their products thereby the products sold are able to price themselves (Hartley, 2017). Consumers have implicitly developed taste for such products causing even the US exporters to consider packaging first before exportation. The exporters evaluate charge in the Japanese market so that more accurate price can be reached by way of comparison.
In Japan, currently pricing has taken another shape whereby competition for used and durable goods can be used to set price of a commodity for example video gaming. Video game products are bought and used however due to satiation, the consumtion value wears away easily but the product itself does not easily depreciate. Therefore, this market behavior gives rise to change of demand and supply elasticity (Jiang & Guo, 2015). Disposing of used video game significantly affects new video game consequently, the revenue on new video game is reduced if the publisher of new video game does not amend prices. This occurs because if used market is eliminated, then future selling prospect is also lost due to reduction in demand for new video games. Similarly, if price for new video game is substantially reduced compared to the normal flat price, the effect is that profitability is still realized. This therefore an instrument of setting prices in the Japanese market. It is important because it enhances value in used products that have not depreciated in value and even helps to reduce the rush of running into overproduction of new products before the already produced products are to completion, however, it kills the spirit of insatiability in business which is vital if invention of new product is to be realized.
According to Pongwasit, & Chompu-Inwai (2016), determining cost and price in a manufacturing company can also be evaluated as follows; a real example can be used in this case is manufacturing of wooden toys. In this example determining price of producing a given unit of wooden toys is challenging especially when traditional methods of price determination is used. To fix cost and price for the above commodity this model becomes profitable. Time-Driven Activity-Based Cost. This requires approximation of supplying capacity per unit cost and time employed for such an activity or transaction. TDABC is then critically analyzed and compared to the present production cost of the highest selling products. If this is done, TDABC proves to be more cost-effective in producing a given unit of wooden toys than when traditional costing methods are employed. Furthermore, if TDABC is used then the manufacturing company can with great accuracy determining the price of a wooden toy. It enables the produce to identify its supplying capacity for production the period of time spent on producing a given unit of product, therefore, it can always be timely in its production schedule.
Cost on what market will bear. This system is completely from other views of what cost is all about. The Japans plan and design goods at lowest cost then quickly introduce them into the market while focus remains on getting cost out of the product during the designing stage.
The product engineer considers the effect of design on cost. The price at which the good is likely to prosper in the market is defined first and cost determination later.
The target cost is pinned on the market is likely to bear rather than determining the cost of the product first. Then the product is introduced into the market whereby price is set that is most probably appealing to the potential buyers.
From this point judgment is made on the cost to be adopted from manufacturing to customer’s expenditure on the product. That is, cost = appealing product price in the market – the expected profit.
For example the new Japanese Toyota cars are assembled, introduced into the market at certain price to test the consumer’s taste and willingness. When the demand is positive then negotiation is done between the company and suppliers to determine estimated costs (Hartley, 2017).
Designers establish approximate costs on every element that make up the car and the departments are further divided to find out cost of every component parts that go into the finished car. This could be helpful in gaining confidence by suppliers.
When suppliers gain confidence on a company, it would be easy doing trade with them even on fair trade credit terms since the supplier is convinced that the company is ready to go out of its way even without benefits. Also, it can ensure customer satisfaction through the process of engaging suppliers who are contact with consumers thereby giving immediate feedback because the designers seem to be at the front when the product is being introduced in the market.
Conclusion
Japanese products are not the best in the world though, have accessed world market easily through its modern product costing and pricing styles. Through the aforementioned product costing and pricing styles and despite the desperate hard work by European countries, Japanese goods have been dominating the market for example in electronics and automobiles. Today, market has become so competitive and dynamic such that without employing strategic modern costing and pricing, a manufacturing company can easily be kicked out the competitive market. Therefore, product costing and pricing is of great business import to the manufacturing community (Nuhu, Baird, & Bala, 2017). It enables a company to decipher how far it can go and still remain with a profit. It is also important to any given company in knowing the performance, doing financial reporting of the company as well as making important decision of whether to sell or further process the products.
References
Entrop, O., Fischer, G., McKenzie, M., Wilkens, M., & Winkler, C. (2016). How does pricing affect investors’ product choice? Evidence from the market for discount certificates. Journal of Banking & Finance, 68, 195-215.
Fullerton, R. R., Kennedy, F. A., & Widener, S. K. (2014). Lean manufacturing and firm performance: The incremental contribution of lean management accounting practices. Journal of Operations Management, 32(7), 414-428.
Hartley, J. R. (2017). Concurrent engineering: shortening lead times, raising quality, and lowering costs. Routledge.
Jarrar, N. S., & Smith, M. (2014). Innovation in entrepreneurial organizations: A platform for contemporary management change and a value creator. The British Accounting Review, 46(1), 60-76.
Jiang, Y., & Guo, H. (2015). Design of consumer review systems and product pricing. Information Systems Research, 26(4), 714-730.
Luna-Reyes, L. F., Zhang, J., Whitmore, A., Jarman, H., Picazo-Vela, S., Andersen, D. L., & Andersen, D. F. (2014). Full Information Product Pricing: An Information Strategy for Harnessing Consumer Choice to Create a More Sustainable World. CAIS, 34, 32.
Mat, T. Z. T., & Smith, M. (2014). The impact of changes in environment and AMT on management accounting practices and organizational strategy, structure and performance. Journal of Applied Management Accounting Research, 12(1), 55.
Nuhu, N. A., Baird, K., Baird, & Bala Appuhamilage, A. (2017). The adoption and success of contemporary management accounting practices in the public sector. Asian Review of Accounting, 25(1), 106-126.
Pongwasit, R., & Chompu-Inwai, R. (2016). Analysis of Wooden Toy Manufacturing Costs Through the Application of a Time-Driven Activity-Based Costing System (The Papers Presented at the Symposium on Mechanical Engineering, Industrial Engineering, and Robotics 2015 (MIER2015) held at Muroran, Hokkaido, Japan on 29-30 May 2015).
Prasad, A., Venkatesh, R., & Mahajan, V. (2015). Product bundling or reserved product pricing? Price discrimination with myopic and strategic consumers. International Journal of Research in Marketing, 32(1), 1-8.
Racz-Akacosi, A. (2017). Product Pricing and Demo Relationship. Small.
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