Academic journal article Journal of Accountancy

Golden Business Ideas

Academic journal article Journal of Accountancy

Golden Business Ideas

Article excerpt

The Art of Pricing

Your CEO comes to you for advice. It seems employees in the marketing department are laboring over how much to charge for a new product. After getting their recommendation and hearing how the marketing mavens ran simulated tests and even test-marketed the product, she doesn't feel confident about the price they are suggesting. Plus, she's in a hurry for an answer.

So she has come to you, she explains, because, as a CPA, you're trained as a financial person, and she believes you'll approach the Problem in a more numbers-oriented way.

So how do you respond?

Point out to her that using numbers alone--and for that matter, marketing research alone--is not the best way to come up with a pricing solution. The best way is to combine the two approaches, and it just so happens, after reading the JofA, that you have a suggestion, which, while not particularly sophisticated, uses a mix of numbers and intuition and can provide a reasonably good answer quickly. And that, you should add, may prompt the marketing department to revisit the problem with fresh thinking.

Here's what to do: Begin by asking the marketing people to pick the best possible price--that is, what they would like to charge if they had done no pricing research at all--in other words, a strictly intuitive judgment. Then, ask them to select two other prices: the highest they believe customers might accept and the lowest the company can afford.

Then ask them to select two more price candidates--one outrageously high and another outrageously low. Now calculate the sales-to-cost ratio at each price level and find the optimum profitability.

Is it perfect? No, pricing-strategy methods rarely are. But if time and money are limited, it's a pretty good approach and a way to stimulate innovative thinking on the subject. …

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