Marketing Essay Questions
It was some sort of a dream to acquire a 3-bedroom condominium unit in the plushest area of the Central Business District of the city. The unit is a simple but functional set of rooms overlooking the lake area, just right beside the 30-storey building housing the consulting office where I had been working during the last six months. Traveling 50 miles from the northern suburbs where I used to live was not exactly the best and cost-efficient way to start a career. After graduating from Northwestern University a year ago, l had initially thought of driving in my new Ford Territory SUV would be a fitting style I can only dream of. Now, it is reality unfolding before my eyes. I park my SUV near the train station beside the school parking lot I once used during college, just north of Evanston, and then I take the Ravenswood train to the loop, dropping off near the Water Tower and walking leisurely to my dream job in an IT firm, just a block away from the Hancock Tower.
The 60-square meter condominium unit at the Spire was purchased from the real estate retailer firm of Global Realty-Dream Town for only $350,000, a real good bargain among the nearby surrounding lofts usually priced at $600,000. The real estate agent mentioned that despite an extremely popular full-costing approach made in the company’s pricing strategy, the condo units remained relatively cheap. (Horngren, Sundem &Stratton, 2000). Indeed the broker confirmed the popularity of the full-cost pricing approach working for 82 percent of companies in the industry (Kaplan, Banker, Atkinson, Young, 2001). With interest rates running at 4 per cent, the price of $350,000 is a good price already equivalent roughly in a future value estimated at $500,000 a few years hence. (Gitman, 2003).
The unit is located near the northeast side of the building with its full-glass windows facing the lakeshore area. The contemporary two-building design allows magnificent lake views while creating harmony with the architectural style of Streeterville and its several distinctive architectural landmarks. As expected from a luxury condo, the features and amenities at the Spire at 600 North Lake Shore Drive are top of the line. The spacious units feature marble-tiled foyers, natural oak flooring with carpeting in bedrooms and hallways; kitchens with Brookhaven cabinetry, granite counter tops and stainless steel appliances; and bathrooms with marble tub/shower surrounds and marble-topped vanities. All master bedrooms provide walk-in closets, and some units also offer linen closets and separate dining rooms. The building is cable-ready and provides individually-controlled heating and air conditioning. Atop the tower are private sundecks and a sculpture garden.
There is a garden at the building’s entrance, a rooftop sculpture “green” garden with art commissioned to complement the sophistication of the building design, and an original photography collection specifically for 600 North Lake Shore Drive, displayed throughout the public areas as well as the elevator vestibules on each residential floor. Despite all the comfort and convenience, the location of these condos is key. The building is steps away from Navy Pier, where you can check out many fine restaurants, cultural events, the landmark Ferris Wheel, and boarding docks for romantic harbor cruises. In addition, the fashionable boutiques, galleries, and businesses along North Michigan Avenue are within comfortable walking distance.
Global Realty is a highly efficient $16 billion real estate outfit based in the city primarily engaged in the real estate retail market with only 40 employees. Its high efficiency factor is due to its highly motivated and trained brokers all experienced in real estate negotiation. The company’s best practice is its subscription to the best incentive in the industry – profit-sharing (Rodin, 2000) among its brokers and agents.
At best the company outlined the major factors it is believed were used in setting the asking price, that is, pricing objectives were determined based on predatory pricing considering the high competition atmosphere in the area. Demand was considered high which could propel what could be market penetration strategy that allows price elasticity based on the variable of the buyer and not of the company. This effectively addresses potential problem accounts as pricing and interest rate are adjusted based on renegotiation with borrowers. Global Realty keeps tab of its fixed and variable costs as it aims to maintain a tight resource control to attain a new target-costing approach to pricing (Kaplan et al, 2001). The company closely monitors competitive prices within its area, develops its own pricing model, compares and benchmarks its tentative figures and sets the alternative pricing method under scenario models to set the final price). Some form of the old-fashioned Stop-Go approaches adopted to check inflationary pressures are constantly on hand should the government not able to check inflation. (Heilbroner,1980) . Global Realty’s approach to comprehensive pricing is able to insulate itself from the dangers of a Wall-Street type of financial crisis.
Global Realty makes limited use of reverse geographic pricing which takes note of the location of the real estate item instead of the buyer or the seller in setting the price of real estate. In this innovative scheme, the buyer located in certain areas is provided a cheaper pricing scheme to encourage investment to flow back into the center of real estate development. This scheme is commonly used in countries where there is large number of overseas foreign workers and retirement perks are reasonably priced versus the perception and reality of quality of the real estate investment (Jim & Kato, 2005) .
Under certain terms and conditions, discounts and allowances are similarly provided to encourage prompt payment of amortizations in self-financed credit packages. This is based on the assumption that billing and collection costs are saved and shifted to the borrower as discounts. In some cases, promotional pricing are resorted to encourage a good number of buyers to close a sale at the shortest possible time. Likewise, differentiated pricing become a pricing option under differentiation pricing strategy by Global Realty despite perceptions of homogeneity (Chernev, 2006). The company has in its record an option of product mix pricing which provides for the optimization of packages that require high margin items to dominate closing of sales. The overwhelming motivation of customers when purchasing real estate items is to find a specific item as quickly as possible with minimal effort. At this point distributors provide a sensational level of added value—they actually have the item available when the customer needs it (Bates, 2007). Moreover, discussion of any price-quality inferences of the purchase based on the asking price and the extent to which pricing cues like the quality factor were used in setting the price and are assumed to have certain degrees of influence in ones buying decision are in reality pervasive and often result to expectations that are not met. (Jin & Kato, 2005).
Comparison of the prices of the condominium units available in the same locality was made and despite the intense benchmarking of amenities and features of the unit, the Spire scored best in all areas. The nearest in terms of pricing was a $390,000 3-room loft located at the back of the Spire but which did not command a breathtaking view of the lakeshore area. Instead, the competing unit faced the west die of the city where gang wars are common. The lakeshore view is the differentiating factor that answered the quality dimension. This implies that the quality factor is a primary consideration in a highly competitive area of homogenous products.(Bester, 1998)
The condo unit was finally chosen on two strong grounds: The price which unbelievably was within the reach of most buyers and the quality factor which matched even the least expectation made on the unit. It was not hard to make a final decision as the product differentiation and pricing is too good to be true. In this case of faster turnover of invested capital, it has become advisable to advocate faster sales at a lower price to take advantage of the plowback advantage. (Kaplan, 2002)
(B) In situations where one organization significantly changed the price on one of its products, either raised or lowered, a competing organization may either respond accordingly or may opt to adopt a certain strategy to counter the resulting flow of the market. In the case of the Global Realty, the competing real estate companies could not adopt a counter strategy since the approach made by Global Realty is the target costing approach (Anthony & Govindarajan, 2001). The pricing provided by Global Realty cannot be matched. And even if the match was made in terms of offer, still the competitor cannot provide the intangible part of the value in terms of the breathtaking view of the lakeshore area. The actions made by the two organizations should have been adoption of a distinct strategy that will not only match, but will create a form of predatory pricing to preempt all possible moves of the competitor thereafter (Shaw. 2003)
(C) Microsoft Inc. as a retailer of the Windows Vista and the Office Accounting can actually integrate the accounting package into its Microsoft office application system similar to the Excel, Word, Access etc. The pricing strategy that can be adopted by Microsoft is cost plus considering the built in advantage of having an accounting software within the application. Cost plus enable a company to recover the cost of implementation at a very minimal level.
(D) John Braxley opened a small business producing school furniture. He already has orders for 50 units so he is very excited about this endeavor. He expects orders for at least 50 units each year of operations. Annual fixed costs for his business are $6,500. Variable costs per unit $150.
Answer the questions to help John to determine what to charge for one unit of furniture.
1. What factors should be considered in determining the price?
The factors to be considered in this case include: the cost factors which includes the volume and quality of material, labor and overhead cost of the furniture. Other factors may include the design, the cost of equipment in terms of depreciation or allocated cost, any rental cost or lease of any resource utilized for the work and the competition as this will depend on the pricing to be done, and the target pricing that the company will adopt.
2. What should the minimum price be to break even with this order?
Selling Price at break-even: 50x – 150×50 -6500=0
Selling price= $280.00.
3. What other methods can be used to determine price?
Other methods that can be used are: target costing which will require the company to retain their core competence and assure patronage from the public through managed costs, cost plus which will enable Global Realty to synergize target costing and cost plus to be fair to all stakeholders.
List of References
Anthony, R. and Govindarajan V. (2003). Management control systems, New York, McGraw-Hill/Irwin
Atkinson, Anthony, Banker, Rajiv D., Kaplan Robert S., & Young, S. Mark (2001). “Management Accounting”, 3rd Edition, Prentice Hall, New Jersey
Bates, Albert D. (2007), Improving Margin with product mix, Mission Impossible, The PEI Journal, retrieved November 12, 2008, website: http://www.thepeijournal.org/content/2q07/mm-improvemargins.php
Bester, H. (1998) Quality uncertainty mitigates product differentiation
RAND Journal of Economics, Vol. 29, No. 4, Winter 1998
Gitman, L. ((2003), Principles of managerial finance, Boston, MacGraw-Hill
Horngren, C., Sundem, G.L., Stratton, W.o.,(2000). Introduction to management accounting, 11th International Edition, Singapore, Pearson Education Asia Pte Ltd.,Singapore
Heilbroner, R. (1980). The worldy philosophers. The lives, times and ideas of the great economic thinkers, New York, Simon and Schuster
Jin, G. & Kato A. (2005) Price, quality and reputation:
Evidence from an online field experiment, University of Maryland
Retrieved November 13, 2005, website: terpconnect.umd.edu/~ginger/research/ebay-exp-dec0105.pdf
Kaplan, R.A. & David P. Norton, (2004). Strategy maps, Converting intangible assets into tangible outcomes, Boston, Harvard School Publishing
Like-for-like sales. InvestorWords.com. WebFinance, Inc. Available at http://www.investorwords.com/6854/like_for_like_sales.html (accessed:May 10, 2008).
Shaw, John C., (2003). Corporate governance & risk: A systems approach, New Jersey, John Wiley & Sons, Inc.