The Marketing Relationship of Costs and Sales Volume as Profits | pugliablog.info
pugliablog.info rights and content. Abstract. According to the price-expectancy model of consumer choice, consumers evaluate For some pairs, the correlation between price and quality created a preference. The relationship between cost and quality is more than an academic concern. Assumptions about the strength and direction of the association are at the heart of. The relationship between an item's price and its quality — and The best-case scenario for consumers, a high-quality product with a low price.
In the advertising industry, agencies had been traditionally paid 15 percent of the cost of the media they bought for a client.
The contractor who rebuilt the earthquake-damaged freeway in Los Angeles received enormous performance incentives by completing the reconstruction early. Other industries as diverse as consulting, trucking, and heavy industrial services are seeing the same trend. Before explaining the benefits, drawbacks, and application of performance-based pricing, let us describe an example involving a complex relationship between ABB and Ford. Ford needed a world class supplier to design and build a turnkey automotive painting facility in Oakville, Canada.
Ford and ABB agreed to work together in an initial preparatory phase, rejecting the traditional approach of bids based on incomplete information. The initial preparatory phase involved a significant exchange of information and perspectives between the two firms, and led to a novel type of agreement. ABB would design and build the plant at a far lower cost than standard.Best Laptops for Students.. and anyone on a budget
Then, if ABB could reduce the cost even further, it would receive a pre-agreed percentage of the savings. This innovative, performance-based approach left both parties significantly better off than under conventional bidding or a negotiated price arrangement. Ford received a significantly lower cost at a lower level of risk: ABB received a share in the cost and design improvements it was able to create.
Performance-based advantages One advantage of performance-based pricing is the often-mentioned alignment that can be achieved between the buyer's goals and the seller's goals. But, that is only part of the story. There are two other major advantages.
Performance-based pricing is insurance. It insures that the seller does not undercharge the buyer. When the final performance of the service or product is in doubt, the performance-based arrangement guarantees that as the seller provides more, it is paid more. Significantly, the buyer also receives insurance that it will not overpay at both the institutional and the individual level.
No person or organization wants to pay more for a product or service than it is worth. Again, when performance delivery is in doubt, performance-based pricing enables the buyer to pay only for the amount of performance that is actually delivered on a measurable basis. Most importantly, the individuals responsible for the actual purchase decision do not want to absorb the career risk of overpaying.
In our personal lives, if we overpay for a product, we suffer some marginal consequence.
In business, it can literally end the job security of a procurement executive. For its insurance role, performance-based pricing creates a greater sense of "fairness" for both buyer and seller. The third benefit may be even more important than the first two. We often see performance-based pricing in highly uncertain situations, and where both buyer and seller must make complex trade-offs among conflicting objectives.
Simple contractual arrangements do not force the buyer and seller to communicate in depth to one another. Performance-based pricing arrangements are generally very intricate.
The parties are forced to deal with one another's limitations, objectives, and trade-offs.
Is Performance-Based Pricing the Right Price for You?
The very process of discussing, in precise detail and with great discipline, these issues develops "wide-band width" communication between buyer and seller. Each has the opportunity to precisely present its objectives, and to explain its own issues. More issues are raised and factored into the high sensitivity problem-solving process. When the two parties involved are buying and selling committees representing different organizational jurisdictions within their organizations, and perhaps different levels of management, the necessity for precision and discipline in communication helps the process within buyer and seller groups as well as between them.
It, in fact, leads to better agreements that provide more value to the buyer and lower cost to the seller. Customers only receive and pay for what they value and suppliers can reduce costs by removing non-value-added service and product components. The win-win aspect of the relationship increases and the zero-sum aspect decreases.
After successful deployment by credible players e. Even Procter and Gamble, the last major consumer packaged goods advertiser to stay with a 15 percent fee, is moving in this new direction. It is sometimes a pragmatic pathway to managing risk, uncertainty, and performance for the long-term benefit of both parties.
Advertising has been a fertile field for performance-based pricing. The September 14, issue of Advertising Age reports that the percentage of marketers who compensate agencies on billings media purchases dropped from 71 percent in to 35 percent in Furthermore, the average profit margins of large agencies, according to a study by Morgan Anderson Consulting, went from 13 percent to about 19 percent.
This demonstrates how profitable performance-based pricing can be. The trend toward broader agency involvement with clients beyond traditional advertising has made it both possible and appropriate for the move to a new pricing approach—one that provides the agency with more opportunity in return for greater risk and broader, more integrated responsibility.
In fact, it is appropriate in only a limited number of situations, albeit some very important ones. But, some limited variants can also be useful.
Price-Quality Relationships by Steven M. Shugan
Penalty clauses are becoming typical in major construction projects. Performance-based pricing is complicated. As with usage-based pricing and point guarantees, the actual amount to be paid can not be determined until after delivery, and often even after usage, of the product or service. Thus, for example, time of day pricing e.
Sales Volume The demand for a product will greatly influence the sales volume of the product. The basic pricing strategy for a product attempts to maximize sales volume and profit.
This requires the business to find the right price that will allow the product to sell while allowing the business to adequately profit from the sale. Under a basic pricing strategy, if the sales volume of a product is too low, the business will generally lower the price point to increase sales. This will, however, also result in a reduced profit on the item for the business. In many cases, lowering the price of a product will result in a higher sales volume.
Profits When looking at the pricing element of the marketing strategy, the business should also carefully consider a realistic profit number that the business wants to make on the product. Generally, a higher profit point will mean a higher selling price for the product. However, by raising the selling price to increase profit, the business will generally adversely affect the demand for the product. On the other hand, lowering the price point of an item will generally lower the profit for the item but will increase the demand for the product.
Regarding costs, the CVP model helps the business to evaluate the effects of cost on changes in volume.