220 CHAPTER12 DESIGNINGPRICINGSTRATEGIES ANDPROGRAMS
the market; even A will consider leaving. Then TI will pick up the business that would
have gone to B (and possibly A). Furthermore, price-sensitive customers will enter the
market at the lower price. As production increases beyond 400,000 units, TI’s costs will
drop even more, restoring its profits even at a price of $9. TI has used this aggressive
pricing strategy repeatedly to gain market share and drive others out of the industry.
Experience-curve pricing is risky because aggressive pricing may give the prod-
uct a cheap image. This strategy also assumes that the competitors are weak and not
willing to fight. Finally, the strategy may lead the firm into building more plants to
meet demand while a competitor innovates a lower-cost technology and enjoys lower
costs, leaving the leader stuck with old technology.Differentiated Marketing Offers
Today’s companies try to adapt their offers and terms to different buyers. Thus, a man-
ufacturer will negotiate different terms with different retail chains, meaning the costs
and profits will differ with each chain. To estimate the real profitability of dealing with
different retailers, the manufacturer needs to use activity-based cost (ABC) accounting
instead of standard cost accounting.^9
ABC accounting tries to identify the real costs associated with serving different
customers. Both the variable costs and the overhead costs must be tagged back to each
customer. Companies that fail to measure their costs correctly are not measuring their
profit correctly, and they are likely to misallocate their marketing effort. Identifying
the true costs arising in a customer relationship also enables a company to explain its
charges better to the customer.Target Costing
We have seen that costs change with production scale and experience. They can also
change as a result of a concentrated effort by the company’s designers, engineers, and
purchasing agents to reduce them. Many Japanese firms use a method called target
costing.^10 First, they use market research to establish a new product’s desired functions,
then they determine the price at which the product will sell given its appeal and com-
petitors’ prices. They deduct the desired profit margin from this price, and this leaves
the target cost they must achieve.Figure 4-10 The Experience Curve