Question

'Aircon Ltd.' manufactures and sells desert coolers with various unique features. There is no competitor of 'Aircon Ltd.' in the market. So they decided to sell these at a high price. Inspite of having unique features its sale was not picking up. They tried to find out the reason for this. After market research they found that to raise their market share, they have to revise their pricing method. The company decides to adopt a pricing method based on manufacturing estimates which should cover the cost of producing the coolers plus a reasonable profit.

1. Identify the pricing method 'Aircon Ltd.' decides to adopt.
2. State one advantage and one disadvantage of this pricing method.

Answer 1

1. Pricing Method: The price strategy that "Aircon Ltd." chooses to use is called "Cost Plus Pricing." Using this method, the selling price is determined by adding a certain profit margin to the overall cost of making the goods.
2. Advantage:
   • Simple to Calculate: Cost-plus pricing is simple to understand and apply. By adding a preset profit margin to the overall cost of production—which includes labour, raw materials, and overheads—the business may calculate the selling price. This guarantees that every expense is met and that each unit sold generates a steady profit. Businesses that operate in stable markets with little cost fluctuation and those who have a strong grasp of their manufacturing costs will find it very helpful.
3. Disadvantage:
   • Ignores Market Demand: The fact that cost-plus pricing ignores competition prices and market demand is a major disadvantage. This approach ignores whether consumers are prepared to pay the stated price or whether there are less expensive options on the market in favour of concentrating just on making ends meet and turning a profit. Setting an excessively high price as a result carries the risk of decreasing sales and market share. Because it lacks the flexibility to modify prices in response to changing customer behaviour and external market conditions, this strategy might not work well in highly competitive marketplaces.