Cost–Volume–Profit Analysis

QUESTION

Now we are building on the second part of the presentation, write 2 pages continuing with the same topic.
Include the following items in your presentation:

What about special pricing for some markets or customers?
Determination of customer profitability.
Show effect on revenues and profitability based on stated assumptions.
Potential advantages and disadvantages, both financial and non-financial.

ANSWER

Cost–Volume–Profit Analysis

Pricing and Customer Profitability

Besides using a cost-plus system of pricing, the organization may also use other pricing strategies to improve profitability. Special pricing may be provided to different customers through the use of various criteria determined by the sales team. Special pricing strategy refers to a pricing system where different prices are offered to customers of a product based on criteria such as quantity, quality, type of customer, or the time frame of purchase (Hanna & Dodge, 2017). Rather than offering the product at a single fixed price, such as $38, the company may introduce a special pricing system where customers will be provided with different prices depending on criteria agreed upon by the management. For instance, if the price is set at $38, the standard price for an air purifier, the company may introduce special pricing based on quantity purchased. Customers who purchase in bulk may be offered a discount – such as $36 for customers who purchase more than ten units.

The company may also offer special pricing to customers based on product sizes or types of products. For instance, larger sizes of air purifiers are likely to have a lower market compared to smaller sizes. Using this knowledge, the company may offer large size air purifiers at a slightly lower cost than small-sized ones to promote their purchase. If the price for small-sized purifiers is set at $38, the price for large purifiers may be set at $36. Special pricing may also be offered on the basis of the type of air purifier being sold. The types and models that are likely to move slowly may be discounted to promote them. The company may also set a slightly higher price on models that have a higher demand to maximize sales and profits. By offerings special prices to some customers, the company will promote sales and increase productivity since discounts attract customers (Hanna & Dodge, 2017).

It is also important to calculate or determine customer profitability. This information will inform future pricing and product marketing decisions. Customer profitability refers to the profit that the company will make from providing a customer with a product over a specific period of time (Plowman, 2017). It is the difference between the revenue earned from and the costs incurred with the customer relationship over a specific time period. Understanding customer profitability will provide business insights on productivity, resource allocation, and product pricing (Plowman, 2017). Customer profitability will be calculated by first totaling the costs involved for each customer: a summation of the total production cost of the number of air purifiers they purchase every year, the cost of transportation or delivery (if provided), and the costs incurred in communication with them. The total costs will then be subtracted from the total amount paid by the customer for the products to identify their profitability for the year.

Assuming that the profitability of customers will be below the targets of the company, the company will have to manage profitability to ensure an increase in revenues. This will involve improved management of finances, marketing, production, and customer service. It may involve the reduction of spending on production and an increase in marketing spending. Customer service should also be improved to ensure the satisfaction of customers and promote sales. Happy customers spend more. Lastly, the proposed reduction in production costs (from $26 to $21 per unit) will improve profitability by increasing the profit margin.

References

Hanna, N., & Dodge, H. R. (2017). Pricing: policies and procedures. Macmillan International Higher Education.

Plowman, B. (2017). Activity based management: Improving processes and profitability. Routledge.