Question

1.

a) Explain the role of demand, variable cost, and perceived benefits/value in pricing. Be sure to define variable cost and value. How does price influence perception of quality? Provide an example.

b) Explain the two seemingly contradictory statements: 1. “The greater the quality the greater the cost and greater the price”. 2. “The greater the quality the lower the cost and lower the price” And explain how successful implementation of total quality management (TQM) helps create competitive advantage to the firm.

Answer 1

a) If the supply in the market can meet the demand the price is determined by the equilibrium of competition.

If demand is more than supply, then price keep on increasing till equilibrium is not reached.

If demand is less than supply then price keep on falling till it reamins profitable for the company.

Variable cost is the cost fixed per unit item sold. So the mariginal pricing depends on the variable cost. Fixed cost gets minimized with economy of scale. Increase in variable cost directly affect the profit margin. So price is increased when variable cost is increased till the product reamins in competition in the market and the profit margin is optimized.

Percieved benefits: When an item is percieved more benficial than its alternative, then price increases for iteven though the cost of production is less. For example, salad is pricier than cooked dishes. Organic products are pricier than chemical products.

Value of the product is the price market is willing to pay for it provided available alternatives.

When same product is sold by multiple brands, customers sensitive to quality tend to buy the costlier products with the perception that they are better in quality. It happens because, customer feel if a product is sold for a premium price, it can't survive in the market if the value it offers for the extra cost can't meet the customer's expectation.

For example, Airconditioners from Blue star are pricier than LG. People percieve that longevity of Bluestar ACs is more so, it is worth spending extra money which will be recovered with time.

People also consider the maintenance cost for a product or salvage value of a product to calculate the cost of ownership. Accordingly people decide to pay more and belive that more price offers better quality as it provides margin for the producer to improve quality. This happens while buying an automobile.

(b) The conventional thought is, to produce better quality products more cost is incurred. So the product becomes pricier to sell. So the statement "The greater the quality the greater the cost and greater the price".

But quality is meeting the customer requirement. There is no greater quality. Products with better specifications are targetted to a different segment of customers willing to pay more. So better quality products cost less to company, as the custiomer complaints will be less, so the loss of goodwill be less. Free service provided by the company is also a cost to company. So a products works fine throughout its declared life, goodwill for the brand increases and it costs less per unit to the company. So company can pass on the saving to the customers as discounts. SO the statement "The greater the quality the lower the cost and lower the price". Example: Maruti Suzuki as a car manufacturer and seller in India.

Total Qualaity Management:

TQM is a concept focused as customer satisfaction. It states that when each and every employee of the company delivers quality product or service expected from him/her, then the final product is of the expected quality. Again this will reduce wastage, expenditure in reworks, over processing, etc. It will ensure that no defects are passed on to the customer. As the quality of the products are maintained, it will ensure the customer satifaction and goodwill. Standardized processes and data driven decision making will resolve the issues and customer complaints faster. Contineous iimprovments can enable to remain competitive in the market in terms of cost and product variability.This can enable the company for premium pricing and reduce cost per unit. Employee involvment will increase employee staisfaction and will reduce attrition rate and the company can retain experienced talents. So the profit margin will improve for the company.