Financial Planning of Organization

Questions: 1. Explain how you will set the price for your offering. Your pricing should be consistent with your financial objectives and address each of the following steps? 1. pricing goals profit-oriented, sales-oriented or status-quo oriented 2. forecast demand, costs and profits 3. pricing strategy penetration, skimming or status quo. Include an assessment of your price/product quality positioning 4. tactics for fine-tuning the base price. 5. Identify any further information needs to be filled and outline the marketing research (secondary, primary) required to do so. 2. Develop an approximate budget for the time horizon of your plan Covering the following elements? Revenue: Forecast sales volume in units multiplied by the average price Less: Cost of production Less: Cost of distribution Less: Marketing costs (from action plan) Projected profit. Answers: 1. A product which is properly identified and commercially produced suffers with the limits of the pricing the product appropriately. Pricing is an exercise which involves profit planning, finding out various alternatives available and thereby selecting the alternative which matches the best organisation practice. A wrong and incorrect pricing can lead to losses and loss in the market share of the business. Toddler bike is a student friendly, childrens bike. So we need to set its price keeping in mind the category of the customer i.e. the children. Also the pricing should be such which also meet the financial objective of the organisation. The product and its specification should be within the financial capacity of the concern. Now we can divide our discussion on the following points: 1) The Goals of Pricing: The goals and objective of the pricing can be profit oriented or can focus on the sales volume or the pricing can be made status quo oriented. In profit oriented pricing the management feels that the sole aim of the pricing strategy should the profit earning and nothing else. It may lead to profits in the short term but can be harmful in long term as the company can lose its customer due higher profits and higher prices. Secondly if the pricing goal is sales oriented then the volume increase should be the main focus of the pricing strategy. If the company wants to increase the sales volume, then the best way to do it to reduce the price of the product. But at the same time the profit of the company would be low. Lastly, if the company wants to maintain the prices quoted by the competitors then the same price as charged by the competitors shall be followed continuously. In this case there are chances that the company incur loss for a period of time. 2) Forecasting the demand, costs and profit: The three most important element of the pricing for a toddler bike are Cost, demand and the resultant profit to the organisation. The cost of the bike shall be added in such a way that the most accurate price is determined. The cost will include the cost of the parts, the labourer cost, overhead cost and other indirect cost which will be apportioned to the product on a reasonable basis. The demand shall be determined as per the other competitors there in the market. The profit element which is necessary for the growth of the business shall be predetermined such that the organisation is progressing to continue the business. 3) Pricing Strategies: The pricing strategy is dependent on the market it operates, the product introduced and the goal of the organisation. A penetration pricing strategy is one which is suitable for long term profit. It is applicable when a new product is introduced but already existing in market. In this strategy the price is very low at the initial stage in order to capture the market. Thereafter the price is increased which results in makeup of the previous losses. This pricing can be applied when the market is elastic one i.e. the market is reacting positively to any price movement. Skimming pricing is just the opposite of the penetration pricing. This pricing is made for the new product which is not there in the market and the price is high at first to cover the advertising expenses. This pricing is related to mobile phones. This is applicable for an inelastic market. The third pricing policy is the Status Quo pricing which focuses on the charging the prevailing prices. If we assume the market is pure competition then the Status Quo pricing shall be the best pricing strategy. 4) Tactics for fine tuning of the price: This part involves the discounts, other sale services like cash discount coupons etc which can be used to attract the customer. An example can be cash sale will entitle the customer with a 10% discount or a price coupon of a certain amount on next purchase, discounts with seasons etc. 5) Other Information required and the marketing research plan: The type of the market, the population composition and other details regarding the company and its production pattern (large scale or small scale) are other factors required to be determined to conclude about the proper marketing strategy. The primary marketing strategy would be directly related with the product and focussing on the primary market of the product. The secondary marketing strategies consist of determining the other factors which are necessary to increase or maintain the sale of the product. 2. Assuming the plan horizon is 3 months, the following budget can be made on the basis of assumptions notes at each stage. The cost of the production consists of the main parts of the bicycle, the safety parts, labour cost, machine costs, overhead and other costs. The sales related expenses include marketing costs, cost of supplying and distributing the cost to the customers. If we look at the WallMart website the price of a toddler bike 12 Huffy Disney Princess Girls Bike the price quoted is $62.97. The budget plan is for 3 months. Assuming the sales per month is 10000 units. Total Sales for the month is 10000*3= 30000 units. The average price for the 3 months is assumed as $62.00. The cost budget can be given as follows: Sl. No Particulars Details($) Amount($) 1 Revenue (30000 units) 30000*$62 per unit 1862000.00 2 Cost of Production ($30 p.u.) 30000*$30 per unit 900000.00 3 Cost of Distribution ($5 p.u.) 30000*$5 per unit 150000.00 4 Marketing Costs ($15 p.u.) 30000*$15 per unit 450000.00 5 Profit as projected ($7 p.u.) 1-2-3-4 362000.00 Assumptions: The cost of production is the major part of the cost which includes the cost of the parts, safety parts, labour costs, machine costs and other overheads. The cost of distribution is the least as there are many customers who directly take the delivery from our stores. The marketing cost is high since there are many competitors in the market who are also selling the same product at the same price. The profit is projected to be $7 per unit. Note: Since, the actual data is not given in the question; therefore the actual result may vary on the basis of market in which the company operates in, the cost elements of the enterprise, the actual population composition etc. The analysis of the cost and project profit is taken on arbitrary basis. The cost of marketing can be less in some cases and the cost of distribution can be high in cases where the delivery is to be made at the customers place.