29 October, 2011 – Articles
There are multiple pricing structures and strategies available to implement. There is not a universal formula applicable to every single organization. For instance, a smaller company with hopes of integrating a larger market may engage in Price Penetration strategies. With this approach, a low introductory pricing tactic may be best to lure in new customers.
On the other side, a more well-known company may use a Differentiation Pricing strategy. In this case, the strength of the brand may warrant a premium pricing strategy without fears of losing the acquired market share to less established companies.
Nevertheless, the majority of organizations use Cost-Plus pricing which is simply adding a mark-up on top of the cost of production/servicing. The goal of this pricing strategy is to earn simply a profit from operating a business. The only problem with this strategy lies in the realm of long-term feasibility. For example, earning a 1% in profits may accomplish the general expected goal but may not result into sustainability.
Because of this inefficient strategy, we will propose the concept of “Minimum Acceptable Profit (MAP)” regardless of the pricing strategy. The MAP is the established and exact threshold/milestone of profitability a company must attain so to warrant its existence. In terms of operating a successful business, it should be unacceptable to engage in any pricing methods that does not provide a MAP. If for example the targeted MAP is 20%, then the pricing structure must reflect this objective. Here the strategy is to categorize the MAP as cost center. Just like paying for the mortgage/lease or the electric bill, this MAP is the most important cost above any other. This MAP should be the first cost a company must pay first and with what is left cover the rest of the expenses. This will guarantee constant profitability.
Now, what happens if after paying for the MAP, there isn’t enough left to cover the rest of the costs? The answer is simple: The company must revisit its overall business model.
If a company must lower its established MAP standard so to pay for other costs, then its chances of long-term survival will be slim. Just paying bills and thriving to stay above water is a losing strategy to begin with.
The accumulation of wealth and retained earnings are indispensable to long-term existence and amassing the MAP consistently is the only route. The lack of accumulated wealth is one of the main reasons why the majority of small businesses fail within seven years of operation. These businesses can never build enough prosperity to sustain economic downturns and market shifts. The ultimate benchmark is to secure the MAP for any effective pricing strategy. Once the MAP is reached, then any other pricing strategies may be acceptable as market situations evolve.
In conclusion, any pricing strategy is acceptable as long as the MAP is outlined as the most essential cost for the organization.
Is it too radical to classify the MAP as a cost?
Think about it for moment…It is the surest route to guarantee its realization.