Cost Analysis and Ethical Considerations Essay: Pricing Strategies
Generally, the objective of pricing has been to provide sufficient ROI (return on investment). Arriving at effective pricing has challenges, even in situations with the most favorable conditions (Coskun & Yılmaz, 2013). Various factors need to be considered when selecting an appropriate pricing strategy. The four factors that need to be considered when determining the pricing of a commodity or service include cost, demand, competition, and pricing objectives. The pricing objective factor can be based on a profit-oriented objective or volume-oriented objective. The cost factor needs to consider the fixed costs ratio to variable costs, economies of scale available to a firm, and its cost structure compared to its competitors. The competition factor considers the number of competitors and product differentiation. The demand factor regarding pricing considers consumers’ buying power, the willingness of customers to buy, and the price of alternative products. This paper examines cost-based and market-based pricing strategies to determine an effective pricing strategy.
Cost-Based Pricing
The cost-based or cost-plus pricing strategy considers costs incurred to determine the cost of a product. The price of a commodity is determined by considering production costs as well as desired profit margin (Zhou et al., 2020). Cost-pricing strategy comes in handy, especially in the manufacturing industry, where there are predictable fixed labor, equipment, and raw materials costs. The profit margin of a product can be increased by reducing such costs without changing the price (Katsigiannis, 2014). One of the challenges with a cost-pricing strategy is that it becomes difficult to change the price of a product once set.
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Market-Based Pricing
The market-based pricing approach sets the price of a product based current market price for the product or substitute products. Market-based pricing strategy considers competitors’ prices in determining the price of a product (Indounas, 2019). The seller of a product has the option to set the price of a product higher or lower than the prices of the same product provided by the competitors. In this regard, survival, profitability, and level of competition are considered while setting the price of a commodity. A seller may set the price of a product higher than that set by the competitors, suppose the market demand for the product is high. Sellers who can enter the market as first movers may benefit from setting a product price higher than the normal market price. However, as other sellers join the market, lowering the prices to align with that of its competitors is key in determining the level of competitiveness.
Guidelines that Govern Acquisition and Contracting
Acquisition refers to acquiring a contract to provide a service or product. The acquisition process requires guidelines to integrate ethical practices in the activities involved. Standardization guidelines refer to the conditions a contractor must meet during the acquisition. Contactors dealing with government projects are required to meet specific standards of conduct. Some of the guidelines that the contractors must adhere to include avoiding conflict of interest or lack of impartiality, performing acquisition activities by considering the aspect of full public disclosure, and avoiding making government-based decisions without authorization or observing official procedures (U.S. Department of Energy, 2017). Parties involved in government contract acquisition ought to avoid bribery activities, disclose confidential details regarding the acquisition, and indulge in activities by taking advantage of the resources at hand.
Conclusion
The concept of fair and reasonable prices in government contracts aligns with the guideline of avoiding acquisition activities that may defraud the Government (U.S. Department of Energy, 2017). A seller who aims to bid to supply products to the Government via the acquisition of contracts may consider the market-based approach in determining the product’s cost. Many sellers aim to place bids for government contracts. Therefore, setting the price based on the current market price may help a seller successfully secure government bid. Governments seek to cut their expenditures and will likely consider a contractor with a fair price for desired commodities.
References
Coskun, A., & Yılmaz, M. (2013). Pricing decisions in educational institutions: An activity based approach. Procedia-Social and Behavioral Sciences, 106, 2112-2118.
Indounas, K. (2019). Market-based pricing in B2B service industries. Journal of Business & Industrial Marketing.
Katsigiannis, M. (2014). A cost-based pricing analysis. In 1st International Conference on 5G for Ubiquitous Connectivity (pp. 264-266). IEEE.
U.S. Department of Energy (2017). An Acquisition Guide for Executives. Retrieved from: https://www.energy.gov/sites/prod/files/2017/01/f34/An%20Acquisition%20Guide%20for%20Executives%20Jan%202017.pdf
Zhou, Y., Li, F., She, J., Kang, C., & Nakanishi, Y. (2020). Cost-based approach for time of use pricing decision. In 2020 IEEE 4th Conference on Energy Internet and Energy System Integration (EI2) (pp. 3535-3539). IEEE.