Agriculture Reference
In-Depth Information
competitor provides sets a standard the agribusiness will be measured against. As mentioned
earlier, remember that value is a relative idea and any value bundle provided by an
agribusiness is judged relative to that of their competition.
In the end, if a profi t cannot be made by pricing the product based on the value it delivers,
at least one of three conditions exists. First, costs may simply be too high—the fi rm needs to
become more effi cient. Second, the product may not deliver enough value compared to the
(effi cient) production and marketing cost of the product and continued production should be
questioned. Third, the product may support other products in some way and the fi rm may
want to continue production at a loss.
Pricing strategies
Armed with a thorough understanding of the value provided, the costs of producing and
delivering the product bundle, the fi rm's pricing goals, and the competitor's strategies, an
agribusiness marketer is ready to make a sound pricing decision. Let's take a look at some
ways to put all of this information together by exploring several commonly used
pricing strategies.
Cost pricing
Cost-based pricing
or
cost-plus pricing
is a pricing method based on adding a constant
margin to the basic cost of the individual product or service. This margin is intended to cover
overhead and handling costs, and leave a profi t. In retail businesses, such as farm supply or
food stores, it is a simple matter to “mark up” merchandise by some percentage.
(
)
×
(
)
=
(
)
Cost
$.
1 00
1 30
.
markup of
30
%
$.
1 30
selling price
Farm construction fi rms sometimes operate on the basis of the cost of materials plus a per-
centage. The markup theoretically represents the cost of handling the product or performing
the service; it therefore varies with different product lines and among different industries. In
reality, the markup may not refl ect costs accurately and markups may be more likely to be
based on tradition rather than logic.
A problem with cost-plus pricing is the diffi culty of allocating fi xed or overhead costs to
a specifi c product or service. Many accounting systems simply are not adequate to determine
how much of the overhead cost should be allocated to each product. And, even if a method
for this kind of determination existed, the cost of keeping track of time spent on such related
product-specifi c expenditures is prohibitive in many cases.
Yet, because of its simplicity, the cost-based pricing method is popular, especially for the
retailing of large numbers of products. In addition, computerized management information
systems allow cost data to be measured and allocated more precisely which facilitates the
use of this strategy.
Competitive pricing
Competitive pricing
lies at the other end of the spectrum. While cost-based pricing methods
tend to ignore market conditions, competitive-pricing methods essentially base price on
competitors' prices. This method involves setting price at the “going rate,” according to
