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Pricing and Governance
tdc is providing the following information as part of our promotional activities.
If governance consultation assistance is required please e-mail tdc
Quote of the Day
"If you know your competitor and know yourself, you need not fear the result of a
If you know yourself but not the opposition, for every victory gained you will also suffer
If you know neither the competitor nor yourself, you will succumb in every
Paraphrased from Sun Tzu on the Art of War
The policies by which an organization decides how their goods and services are priced is
confusing at best.
Often prices are set with total disregard for generating the needed income to satisfy the
organization's objectives and mission.
The trap that some organizations get themselves into is that pricing is established only
to recover costs. This in the short term might be satisfactory but in the long term is
Many internal and external factors influence the organization's pricing policies.
Internally this might mean the satisfaction of the general mission and objectives of the
organization and externally satisfying a purchaser before all else.
One of the most difficult decisions any governance body faces is the determination of a
general pricing policy. Although some organizations say that pricing is an administrative
function, it is cautioned that the revenue stream policy effects the long term vision and
objectives and therefore pricing review should always be an agenda item at the Board of
There are three generally accepted pricing approaches:
This includes all the costs associated with producing the item(s) plus some reasonable
profit determined by a reasonable return on investment that can be obtained in other
Meaning that the service or goods are priced so that the buyer is able to pay the
Meaning that the service or goods are priced so that market share is not given to your
competitors and in some cases designed so that market share is gained.
Because of the dynamism of the marketplace pricing is delicate balancing act that requires
In the final analysis, it is the buyer who ultimately
decides the price based upon their perceived value of the goods or services for sale.
Governments and some non profit institutional organizations holding monopolistic market
positions often are not faced with buyer based and competition based pricing pressures.
They often price (tax) according to a cost policy in order to just recover a portion of
their costs. This type of deficit financing is dangerous because pricing is done only with
the self interest of cost recovery and is clearly a conflict of interest upon the part of
Businesses on the other hand operating in a free enterprise system have no other choice
but to offer pricing policies based upon a fair return on investment, satisfying the
perceptions of value of a customer and pricing incentives that will stimulate market
growth. Not an easy thing to do.
Here are a few questions that policy makers should ask when presented with pricing
- Are the prices presented able to generate the
needed revenue to recover all manufacturing and associated overhead costs during the
expected product life of the goods and services sold ?
- Is the expected return on investment (net
profit after taxes) equal or greater than what can be obtained with less risk elsewhere?
- What is the nature of contingency cost factors
incorporated into the pricing of products?
- What will be the impact of increasing or
decreasing the price on market share ?
- What will be the impact of pricing above or
below the competition?
- What are the results of market studies done on
consumer acceptance for the pricing suggested?
- What are the marketing risks and what can be
done to reduce them?
- If this is a new product introduction that is
priced low to obtain market share, when and how will the price be adjusted to reflect a
fair return on investment
Here is a link to a Web Site that details
Net Profit Margin
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tdc Marketing and Management Consultation, Brockville, Ontario Canada. All rights