Honors Contract - Work Products |
Decisions on Pricing: The Accounting and Marketing Connection Introduction Lacking the proper foundation for statements and conclusions with respect to the larger objectives of this project, the author's personal comments and observations presented within this report are focused specifically on the varied approaches for teaching the general marketing concept of pricing. For reasons of continuity and ease, this report is organized as a document-by-document review presented in the identical order in which the original text material was received. Each section begins with identification of the text from which the chapter material was originally extracted, continues with description of the critical deliverable principles, and concludes with evaluation of and comment on the quality and chosen delivery of each principle. The reference material upon which the report is based is comprised of five sources denoted as follows: 1) Junior-level Marketing Text: Chapter 17 – Pricing Concepts, 2) Junior-level Marketing Text: Chapter 18 – Setting the Right Price, 3) Sophomore-level Managerial Accounting Text: Chapter M3 – Producing Goods and Services: Batch Processing, 4) Junior-level Accounting Text: Chapter 12 – Pricing Decisions and Cost Management, and 5) Senior-level Marketing Text: Chapter 9 – Pricing Programs. Review of Junior-level Marketing Text: Chapter 17 – Pricing Concepts Definitions of fundamental terms in this chapter are excellent; however, none surpass the spot-on description of the word “price.” This is the only reviewed material that offers the perspective of explaining price from both the consumer and seller positions. Discussions of demand, market share, profit maximization, supply, price equilibrium, variable cost, fixed cost, marginal cost, and elasticity did not enhance the understanding of pricing concepts as these topics were covered in greater detail during a recent microeconomics class attended by the author; however, should less prepared students reference this text material, they will find the descriptions of these topics adequate. Description of the product life-cycle concept is valuable mainly because the text provides the product’s position, the corporate pricing strategy relative to that position, and the resulting market manifestations of that strategy. Using price as a promotional tool to increase consumer interest, as well as the strategy of prestige pricing, expands the student's understanding of the concept of pricing beyond that of the simple profit-motivated strategies found to be more obvious. The discussions on cost determinants of price and break-even analysis take a logical backseat to the explanation of product life-cycle, as product life-cycle displays a more global approach to pricing. Finally, the text describes attainability, specificity, and measurability as critical elements of pricing objectives, and serves to focus heavily on these tangible aspects of pricing concepts. Review of Junior-level Marketing Text: Chapter 18 – Setting the Right Price "Choosing pricing strategy" is a lesson that delivers outstanding descriptions of the three topic approaches (i.e., price skimming, status quo pricing, and penetration pricing), yet leaves the reader with a desire for information on quantifiable market benchmarks for application. The discussion of legality and ethics of price strategies is a three-page lesson that results in the text’s authors essentially stating that current legislation is ineffective and easy to circumvent. There is no inherent value in this lesson with respect to pricing concepts. The emphasis of this chapter is on the tactics for tuning base price. The importance of harvesting critical market data and being sensitive to the effectiveness of discounts and geographically-based pricing is the type of quantifiable measure that is most valuable. Of the types of pricing strategies described, value-based pricing enhances the vision of the pricing concept greater than all others. The remaining strategies presented in Chapter 18 are either unique applications for unusual circumstances or contain serious pitfalls if implemented incorrectly. Value-based pricing employs the end consumer as a primary determinant and the competition as a secondary determinant. Concepts like product-line pricing, bundling, and unbundling force the student to reconsider, and possibly disregard, the traditional single-item concerns that usually drive pricing considerations. Treating entire lines of product or combinations of product in quantity, provides additional options for strategic pricing not mentioned in other texts. Once again, the student becomes more educated on the concept of pricing when measurable steps are provided for use under known conditions. For example, the text's discussion on appropriate pricing tactics for inflationary and recessionary times provides direct courses of action during specifically recognizable economic conditions. Review of Sophomore-level Managerial Accounting Text: Chapter M3 – Producing Goods and Services: Batch Processing Unlike the Junior-level Marketing Text, this managerial accounting text stresses unit cost as a driving factor behind all pricing decisions. Extreme concern is given to determining the most accurate unit cost possible. Marketing strategy, market share, and product life-cycle are described using similar terminology as that within the college Junior-level Marketing Text, but with diminished importance in relation to the unit cost. The managerial accounting perspective of pricing appears to be fundamentally the same as that presented in the marketing text, but is approached from the opposite side of the "complexity equation;" that is, managerial accounting appears to base its lessons on a critical understanding of the smallest elemental components (i.e., what elemental component(s) ) so that one may work outward toward larger, more complete pricing strategies. In contrast, the marketing text presents several grand strategies and then leads the student through a regression toward their elemental components. Review of Junior-level Accounting Text: Chapter 12 – Pricing Decisions and Cost Management As the superlative overall text reviewed, this material, while using slightly different terminology, manages to capture the spirit of all previous materials combined. An excellent and valuable distinction is made between short-run and long-run pricing decisions. Again, the concept of an accounting text utilizing unit cost as the basis for the pricing lesson is prevalent. In Chapter 12, unit cost is further refined into its component elements through a more thorough investigation of manufacturing costs, included in the explanation of activity-based costing. Additionally, this text places cost-based pricing adjacent to market-based pricing such that a clear comparison between the two approaches may be made. Cost-plus pricing is not a topic unique to this text; however, Chapter 12 provides in-depth analyses of cost structures that are the best and most comprehensive. One shortcoming admitted by authors of both accounting texts is the difficult and arbitrary nature of accurately computing invested capital – this is a troubling admission given that most of Chapter 12's lessons are based on accurate computation of costs. This text presents a strong and convincing point for using the worst-case scenario, or full cost of the product, for its cost-based pricing decisions. Although the product life-cycle explanation is consistent with the other texts, Chapter 12 continues by introducing the concept of customer life-cycle. These two concepts, when placed beside each other, force the student to consider the causal relationships that may be beneficial in pricing decisions. This text also elaborates on legal statutes that are ultimately proven to be easily circumvented and therefore largely ineffective. Review of Senior-level Marketing Text: Chapter 9 – Pricing Programs With prior knowledge in place, the general concepts discussed in this chapter appear as review. Although Chapter 9 tends to apply the broad principles of elasticity and demand to company and organization-specific approaches, the author appreciates the unique presentation of these basic topics. The estimation of price elasticity in this text, more so than in the others, stresses the valuable perspective gained by ensuring that company sales and prices, as well as industry sales and competitive prices, are used as historical data. Additionally, Chapter 9 cautions against the relative nature of historical data. This text uniquely warns against the destructive practice of initiating price wars the instigating combatant is not prepared to win, and discusses full-cost and cost-plus approaches similarly to previous texts. Chapter 9 presents many of the same topics as Chapter 18 of the Junior-level Marketing Text, but uses different terminology. For instance, status quo pricing in Chapter 18 is the same concept as parity pricing in Chapter 9. Similarly, prestige pricing in Chapter 18 is the same as premium pricing in Chapter 9. Of particular interest is the concept of anchoring. Anchoring in Chapter 9 is similar to price lining in Chapter 18; however, Chapter 9 forces marketers to look at a more integrated form of this pricing strategy. Summary - General Comparisons between Marketing and Accounting Approaches to Information Introduction If one were to compare the concept of pricing to the study of physics, one would equate the accounting approach to particle physics and the marketing approach to Newtonian physics. The reviewed accounting texts look carefully at individual costs and build outward toward the concept of larger strategies based on individual costs. The reviewed marketing texts begin with larger concepts, such as general market conditions and pricing strategies, and work inward toward contributing factors. It is the author's opinion that the accounting texts use more direct and quantifiable examples than their marketing counterparts; however, the marketing texts are far more sensitive to the fluidity imparted to market conditions through human behavioral activities. The most articulate and encompassing lessons are available in Chapter 12 – Pricing Decisions and Cost Management. There is a surprising lack of standardized language used between disciplines. One may erroneously assume that, given the maturity of Economics, Marketing, and Accounting as academic fields of study, there is an established consensus on terminology among disciplines. All reviewed texts provide excellent lessons that should be streamlined, simplified, and made cross-functional through development of a common vernacular. |