Cost-plus pricing
Cost-plus pricing is a method used to determine the price and represents the main idea in business. It includes selling products or services at a higher price to increase profits. The cost pricing strategy is a method that includes less market research and doesn’t take into account company strategies and consumer demand. Many companies use cost-plus pricing for supply contracts because the strategy uses few resources. It does not require a lot of additional market research because the business can acquire the cost of production by adding up labor costs, different invoices, etc. The firms can then take the summed costs and place a margin on top that they believe the market will bear (Atamer and Pichonnaz, 2020). r. Cost-plus pricing provides firms with full coverage of costs and a consistent rate of return. It ensures that the full cost of establishing the product is covered thus allowing the mark-up to ensure a positive rate of return. Cost-plus pricing also hedges against incompetent knowledge. It is beneficial when the firm has no information about the customer’s willingness to pay and there are no direct competitors in the marketplace.
There are various problems that the strategy of cost-plus pricing brings to the business. For instance, the strategy does not take into account consumers. It completely disregards the customer’s willingness to pay. Customers are very important to every business (Sexton, 2019). For a firm to make money, it must involve the customers. Cost-plus pricing does not take customer value into account, thus creating a vacuum that sucks all of the profit out of the firm. It creates a culture of a profit of losing isolationism. The strategy is inefficient because the firm stakeholders can easily be passive towards pricing and facilitating laziness. Because of the strategy, there may be a waste of profits as the market and customer continues to change.
Gina should not contest the price increase because, at the end of the whole process, it will have quality products. Bhagat may have increased its labor costs because of the increase in the number of workers or to train the works (Liozu et al., 2015). High numbers of workers that are well trained are lead to quality production of the machine parts. Gina will purchase the quality machine parts, which they will sell at a good price to the customers, earning its profits and more customers because of their quality products. The increase in prices is more likely to be justified in the long run because Gina will attract more customers due to their quality products thus higher profits
An increase in the price of machine parts affects the production decision. An increase in the price of the machine parts increases the costs of production. Due to an increase in the cost of production, the firm will not be willing to offer the same quantity at the same price. They will increase the price of the product to help cover the higher costs.
References
Atamer, Y. M., & Pichonnaz, P. (2020). Control of Price Related Terms in Standard Form Contracts: General Report. In Control of Price Related Terms in Standard Form Contracts (pp. 3-63). Springer, Cham.
Liozu, S., Boland, D., Hinterbuber, A., & Perelli, S. (2015). Mindful Pricing: Transforming Organizations Through Value-Based Pricing. In Marketing Dynamism & Sustainability: Things Change, Things Stay the Same… (pp. 412-421). Springer, Cham.
Sexton, D. E. (2019). The Dangers of Cost-Plus Pricing.