Profit margins

Question

Examine within your answer the circumstances that will enable a company to pass on cost increases to customers and protect profit margins. For example- price sensitivity of demand, rising food prices, cotton prices, etc.

Answer 1

It is quite true that setting right prices is one among the major challenges faced by each and every business nowadays. Business possessors very well recognize the importance of pricing, but get anxious at any time they think about increasing their prices. The apprehension, certainly, is the actuality that in case if they amplify their prices, they would have to face the risk of losing customers. If customer decides to buy from a particular company exclusively on the grounds of price, they can also go anywhere else on the grounds of price. The customers can anytime switch over to other product or company offering the same product at lower cost than the former. Moreover, if the prices set by a company are reasonable they would allow the company to keep hold of its clients and to obtain more and more customers.

However, in some situations price opposition is usually just superficial; good superiority as well as consumer service is considered to be more significant especially in the longer run. A number of consumers would comprehend that the company needs to pass on the incremented costs of resources such as raw material, rent and fuel which is entirely out of the company’s control it. Moving ahead, as long as the company could make clear the grounds for the cost increments, the clients won’t visualize the organization is stuffing its revenues that to at their cost. If the company increments costs above those of its challengers, it need to make clear in consumers mind the fact that the greater cost puts forward higher advantages as compared to the goods offered at lesser costs by the competitors.

Moving ahead, each and every company irrespective of the size and product they deal in, faces the problem of increased price these days. The main challenge is to pass on this increased cost on customers and protect profit margins in a way it does not offend or dissatisfies them. There are several means to do so. Firstly, differ pricing through intensifying the organization’s offerings. For instance, the company can develop a package of goods. Even though individual products continue to be at the normal price, a package of two or products might cost the equal of 10% less as compared to the price if the items were bought independently.

In addition to this, the other means to obtain superior overall pricing is to provide distinct kinds of consumers with distinct prices. A large number of companies provide discounts to children, students, senior citizens etc. Apart from this, the company can also go for strategies like offering a new look to a previous product such packaging or feature, in order to convince the customers that the increased price is due to the new look. At the same time the companies can manage to shift over the increased cost on customers in an efficient manner. Further, it is highly essential to efficiently manage the company’s prices and make sure they are not being determined by rivals or consumers.