PRICING TECHNIQUES IN PRODUCTION MANAGEMENT

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QUESTION:

What pricing techniques are you going to adopt as a marketing manager?

ANSWER:

The strategy of techniques of pricing to what the market will bear can be the most productive from a profitability standpoint.  This policy, when coupled with non-commodity type products can give pricing flexibility which can be the key to manufacturing profitability in inflationary  economies.

Below are some pricing techniques:

i.             Cost – plus pricing

ii.           Pricing at the market price

iii.         Pricing below an established market price (Penetration pricing)

iv.          Pricing above existing market price

v.            Loss-Leader pricing

vi.          Limit pricing

vii.        Odd number pricing

viii.       Prince lining

ix.          Price discounts

After list the above, please choose one that you can argue favourbly.

QUESTION:

Why should a company introduce a value analysis into their product?

ANSWER:

Adding a value will lead to demand and increase in sales and profit.

Write short notes on the following:

a.   Line Balancing

b.   Batch Production

c.    Intermittent production

d.   Continuous production

SOLUTION:

LINE BALANCING: Assembly lines are special case of product layout.  In a general sense, the term, assembly line refers to progressive assembly linked by some materials handling device.  Clearly, lines are an important technology and to really understand their managerial requirements, one must have some familiarity with how a line is balanced. 

Line balancing activities are usually undertaken to meet a certain required output from the line.  In order to produce at a specified rate, management must know the tools, equipment  and work methods used and the time requirements for each assembly task such as drilling a hole, tightening a nut or spray painting must be determined .  In line balancing, management also needs to know the precedence relationship among the activities, that is, the sequence in which various tasks need to be performed.

BATCH PRODUCTION:  This occurs when a quantity of products or components are made at the same time.  There is repetition, but not continuous production.  Production often is for stock, but if a batch is required to fulfill a special order, the items are usually completed in one run.

INTERMITTENT PRODUCTION:  is a process that has varieties in the flow of materials in production and is often called job order or job for production.  It is characterized by production of specific customer orders after the orders are received.  The product is built to customer specifications.  Machines shop that produce a wide variety of products to customer specifications are example of intermittent production.

CONTINUOUS PRODUCTION: - It is characterized by a constant flow of material in the production process.  Continuous production processes are characterized by production of a standardized product to stock before specific customer orders are received.  A factory assembling refrigerators is an example of continuous production.

  

Question:

Explain each of the following cost concepts:

a.   Historical Cost

b.   Implicit Cost

c.    Marginal Cost

d.   Long-run cost 

ANSWER:

HISTORICAL COST: This refers to the cost of an asset acquired in the past.  It is used for accounting purposes, in the assessment of the net worth of the firm.

IMPLICIT COST:  Costs which do not take the form of cash outlays, nor do they appear in the accounting system are known as implicit or imputed costs:  Opportunity cost is an important example.  For example, suppose an entrepreneur does not utilize his services in his own business and works as a manager in some other firm on a salary basis, if he sets up his own business, he foregoes his salary as manager. This loss of salary is the opportunity cost of income from his own business.  This is an implicit cost of his own business.  Thus, implicit wages, rent and implicit interest are the wages, rent and interest which an owner’s labour, building and capital, respectively, can earn from their second best use. 

Implicit costs are not taken into account while calculating the loss or gains of the business, but they form an important consideration in whether or not a factory would remain its present occupation.  The explicit and implicit costs together make the economic costs.

MARGINAL COST (MC) is the addition to the total cost on account of producing one additional unit of the product.  Or marginal cost is the cost of the marginal unit produced.   Marginal cost is calculated as TC_n-TC_n-1

Where n is the number of units produced.  Alternatively, given he cost function, MC can be defined as MC = dTC/dQ.

LONG-RUN COSTS: The analysis of short-run Costs reveals how a firm’s costs will vary in response to output changes within the limits of a time period short enough so that the size of the plant may be regarded as fixed.  By extending the logic one step further, it is possible to develop a long-run cost curve or function which correspondingly, is one that shows the variation of cost with output for a period long enough so that all productive factors, including plant and equipment, are variable. 

The knowledge of such a long-run cost curve, or planning curve as it is also called, can be of use to management ;

i.             In determining output rates over periods long enough so that  assets acquired for use during the period can be fully extinguished, and

ii.           In establishing rational policies as to optimum plant size, location, and general operational standards.

Long-run costs are by implication the same as fixed costs.  In the long-run, however, even the fixed costs become variable costs as the size of the firm or scales of production increases.  Broadly speaking, long-run costs are associated with the changes in the size and kind of plant.

 Question:

Explain the reasoning that underlines each of the following:

a.   Odd number pricing

b.   Pricing below the market price

c.    Pricing lining

SOLUTION:

ODD NUMBER PRICING: Most of the products we buy at the retail level are priced at odd values. For example, N5.98 rather than N6.00, N6.89 rather than N7.00 and so on.  It is no accident that these odd value prices are used rather than their even valued price.  This strategy is based on an assumed psychological force which causes consumers to perceive a slightly lower odd number price as significantly less than its even number counterpart.

PRICING BELOW AN ESTABLISHED MARKET PRICE: It is sometimes preferable for a firm to set price below the current market price for its product group.  Two particular cases of this type are most important. Consider first, the case in which a firm wants to expand its product mix to utilize excess capacity and in which the new product must compete with established brands already on the market. 

Setting the price on its new entry somewhere below the prevailing price of competitors will provide a wedge to help it become established in the market. The rationale for setting price below the market price is clear.  With an elastic demand, a lower price will result in greater total revenue.  This method of pricing is often referred to as “Penetration Pricing” because it provides a mechanism whereby a new product can penetrate an existing market.

Penetration Pricing may also bring consumers into the market that may even surprise the firms involved.  If a new product is innovative in some respects, a penetration pricing policy may be helpful in getting innovator and early adopter groups to try the product.  Once the product has gained acceptance in the market place, the firm may try to reduce or eliminate the price differential.

Once more, this can be related to the concept of price elasticity.  This acceptance of the product by consumers implies a growing inelasticity of demand.  The case of setting price below the current market price assumes that the product is essentially the same quality as those already on the market and is sold with the same type of service and warranty and is available through comparable channels. 

PRICE LINING:  This pricing strategy is particularly common in furniture, appliance and department stores.  A particular class of product will be offered in more than one line based on quality or design characteristics.

In all likelihood, at least, three lines will be offered to the prospective consumer, like the: 

Ø  Basic model

Ø  Basic model with added quality and design features

Ø  A top line model with all features

Price lining has been quite widely used in a variety of situations.  A single manufacturer may produce their product in different lines to appeal to various income groups.

Good luck!