Question

Samantha has been tasked by her manager to determine a pricing approach that will grow unit volume and profitability of “Out-her-wear” her brand of rugged outerwear geared to younger women. She wants to make a positive impression on her manager and is considering the option of implementing a variable cost pricing policy for the Out-her-wear brand. She reasons that a variable cost pricing policy will provide the greatest incentive for consumers to purchase her brand, while making it difficult for competitors to respond. Samantha knows that you are a pricing “guru” as a result of taking ICORE. In discussing the merits of Samantha’s variable cost pricing recommendation, you want to help make her aware that:

A. as long as samantha uses variable cost pricing the brand may not recover its fixed costs

B. variable cost pricing can support a low-cost source of competitive advantage for her brand

C. customers are easily confused about quality when prices are lowered compare to competitors

D. many of her competitors may retailate with increased promotion spending

E. variable cost pricing will ensure at least break-even and the possibility of positive unit margins

Answer 1

variable price costing is the strategy that is commonly used by the retailers in order to lower their product price. This is a pricing strategy in which the main focus remains on the variable cost that is the cost that depends on the production level. If the product will be higher, the variable cost will be higher and vice versa.

Although this pricing policy has some benefits of not including the portion of the fixed price in order to make the price lower, this will also hamper the organization by lowering its capability of recovering the fixed cost that includes the investment made in production infrastructure, salary, machines and equipment and so on. In the absence of recovery of the fixed cost the company’s investors will face losses and they will not be able to recover their investment.

At the same time, this sort of pricing policy mainly relies on gaining competitiveness on the bass of the low price rather than the other important elements of the strong brand such as quality, technology, and R&D. All these elements of competitiveness can be important factors and may not be easily copied by competitors. Thus the variable pricing policy will be based on a very weak competitive strategy that can be easily copied and thus the company ay loses its USP.

If we look at the point of view of customers, when the products are sold at a lower price than the other products, the customers doubt the quality of the product as they create a direct correlation between the price and the quality so this policy will not help in creating a good quality image of the product

While in the case of competitors, this strategy or competitiveness can easily be brusted by spending more money on advertising and being present in front of the customers all the time in the form of intensive advertising. They can also lower the price of their product to compete with the company

Variable pricing only results in recovering the break-even at the minimum level butt in order to operate effectively and to sustain in the long term, the company has to operate more than the break-even point so that it can have more profit so that they can develop new products, invest in new projects and come up with the new offers to the customers.