Resumo:
Propsito do Trabalho:
Over time, studies concerning price-setting approaches have evidenced a mismatch between theory and practice (Lucas & Rafferty, 2008). The oldest gap observed by researchers shows that the view of neoclassical economic theory does not match the business practice. At the present time, researchers of marketing have suggested the existence of another gap between price-setting theory and practice. This gap arose when empirical research began reporting that companies were still setting their prices based on cost, rather than starting to provide them with value as a basis (Hinterhuber, 2008).
While the gap between economic theory and companies practice has been extensively explored and explained, the gap between the marketing normative view and companies practice needs further clarification. After all, considering the way how empirical studies are structured, we still may not claim there are decisive conclusions that the cost-based price approach replaces the value-based price approach.
Therefore, the general aim of this research is checking whether researchers claim that the use of cost-based price approach prevails over the use of value-based price approach is pertinent. In other words, the general aim of this research is identifying whether price-setting based on cost plus margin is opposed, in fact, to the value-based price approach.
Base da plataforma terica:
Several marketing studies have been prepared to suggest, directly or indirectly, the adoption of the value-based price approach (i.e., Hinterhuber, 2008; Calabrese & Francesco, 2014). Nevertheless, empirical evidences show that total cost plus margin is the most frequently applied method to set prices (i.e., Guilding, Drury and Tayles, 2005; Avlonitis & Indounas, 2006; Guerreiro, Cornachione Jr. and Kassai, 2012). Thus, a mismatch between the marketing theory and companies practice has been stated by recent studies.
However, a major drawback of these studies is the fact they usually end up labeling all companies as those adopting the cost-based price approach simply because they use formulas that consider the element cost. This is a perceptual bias, because many among the surveyed companies might be using a price formulation based on a contribution margin inspired by the clients value.
First of all, it is noteworthy that not all companies may set prices. According to Guilding et al. (2005), there are price-makers and price-takers. The price-taking companies have access to competition information bases, however, in the case of price-making companies, it is not always possible to capture with ease the prices offered by competitors.
So the price-makers need formulas in order to operationalize price-setting and, according to Guerreiro et al. (2012), those formulas essentially include two elements: (i) cost; and (ii) margin. The rationale of these elements lies on the fact that price-makers, as they have no price benchmark, follow the predominant guideline of seeking to regain all costs and achieve the desired margin.
Nevertheless, it is not because the price formula necessarily includes the cost element that the company has necessarily applied the cost-based price approach instead of the value-based price approach. After all, the formula expresses the form, but not the essence of the price-setting approach. A rather detailed analysis of the way how cost information is used by the company shows that any of two approaches can be operated by means of a mathematical formula that includes cost as an element.
In the cases where the company uses the full cost method or the absorption cost method, there is no doubt about using the cost-based price approach. This is so because when applying the element total cost in the formula, the result is offering a price capable of covering all costs (both fixed and variable costs and, in some cases, also all expenses) and, in addition, providing the desired profit margin. The company is faced with zero possibilities to charge a price different from that indicated by the formula.
On the other hand, in the cases where the company uses the variable cost method, the value-based approach may be found. The use of contribution margin provides the link between the formula containing the element cost and the value-based price approach, because it does not imply the need for all products and all clients to equally promote this coverage. As it is determined by the business policy, not only costs, it may vary depending on the products and clients. Therefore, contribution margin is the element in the price formula reflecting the value a product has to the client.
Mtodo de investigao:
We studied closely a real case through the action research method. We chose this method because with it, the actors involved participate along with the researchers to analyze reality, diagnose problems, and propose solutions in an interactive way. One of the authors participated in the development team of new conceptual models of the costs and prices planning systems of a Brazilian company. The observations and analyses of this study were carried out concurrently with the development of these new models.
For confidentiality purposes, the actual name of the company is not disclosed, it is replaced by Customized Chairs, CC herein. CC is an industrial company, medium-sized, located in southeastern Brazil. Its average annual revenues are around US$ 60 million and its structure has about 600 employees. CC produces and sells various kinds of chairs, and each line has a large number of analytical products. They are unique products developed by the company to meet the needs of a variety of clients. Some lines have simpler and less expensive products, i.e. products aimed at client segments with lower purchasing power. Other lines have rather sophisticated products aimed at markets that demand higher quality and exclusivity, whose clients have higher purchasing power. CCs clients are companies in general, public schools and private schools, and various kinds of service offices. The company does not focus on meeting the domestic needs of natural persons.
We demonstrated the application of the research propositions in CC and we also exposed numerical examples to clarify the difference between cost-based and value-based price formation in CC through mathematical formulas based on costs.
Resultados, concluses e suas implicaes:
We pointed out that CC is typically a price-maker, given the characteristics of its business, as well as its activities in the B2B environment with unique products and highly customized projects. As a price-maker, CC may have its price-setting approach based on cost or based on value. An approach based on competitors is not feasible, because CC cannot get information on which might be its competitors prices, since they also work with customized products and projects.
In order to operationalize price-setting and adopt the cost or value-based approach, CC needs a mathematical formula. The mathematical formula used by CC implies the mechanics of product cost plus desired margin. The product cost included in this formula may be determined by the variable cost method or by a cost method that includes variable costs, fixed costs, and expenses.
CC, for a long time, had been setting prices primarily due to total product cost, calculated by using the full cost method, coupled with the desired profit margin. That is, CC had been traditionally adopting the price-setting approach based on cost. Nevertheless, during the discussions that took place in the conceptual review process of cost models and price planning, several arguments claiming the managerial superiority of the variable cost method when compared to the full cost method were presented. These arguments led the project team to propose adopting the variable cost method to calculate products costs and the use of contribution margin to measure profit. Product cost according to the conceptual model started being formed only by the variable cost of raw materials. Margin, in turn, which became the contribution margin in price percentage, began to promote the connection between cost and products values. Therefore, CC started adopting a value-based price-setting approach.
Thus, the case study carried out illustrated, in the context of a price-making companies, the possibility to apply cost and value-based price approaches through the concept of cost plus margin. When the cost of the product used in the process is determined by the absorption cost method or by some full cost form, it may be claimed that companies use the cost-based price approach. On the other hand, when the cost of the product used in the process is determined by the direct or variable cost method, it may be claimed that companies use the value-based price approach.
The value-based price appears in the case of price-making companies employing costs determined by the direct or variable cost method because the formula includes the variable product unit cost and the desired contribution margin. The contribution margin is included as an element that reflects value. Therefore, it is not because they use a mathematical formula containing the element cost (variable cost) that they adopt the cost-based approach. So, it is not correct to state they adopt the cost-based price approach.
In summary, the case study findings provide the logical sequence and the support required to conclude that price-setting based on cost plus margin does not conflict with the value-based price approach. As a result, it may be claimed that using a price formula that contains the elements cost and margin does not necessarily mean that the company sets prices based on cost.
The key contribution of this paper is demonstrating that in certain business environments, such as, for instance, B2B, using the price formation mechanics based on cost plus margin is the way found by companies to enable the approach adopted. The approach may be cost-based price or value-based price. Much research make a conceptual mistake by classifying all price-making companies as those adopting the cost-based price approach simply because they use formulas containing the element cost.
Referncias bibliogrficas:
Avlonitis, G. J., & Indounas, K. A. (2006). How are prices set? An exploratory investigation in the Greek services sector. Journal of Product & Brand Management, 15(3), 203-213.
Calabrese, A., & Francesco, F. (2014). A pricing approach for service companies: service blueprint as a tool of demand-based pricing. Business Process Management Journal, 20(6), 906-921.
Guerreiro, R., Cornachione Jr., E. B., & Kassai, C. R. (2012). Determining the plus in cost plus-pricing: a time based management approach. Jamar: Journal of Applied Management Accounting Research, 10(1), 1-16.
Guilding, C., Drury, C., & Tayles, M. (2005). An empirical investigation of the importance of cost-plus pricing. Managerial Auditing Journal, 20(2), 125-137.
Hinterhuber, A. (2008). Customer value-based pricing strategies: why companies resist. Journal of Business Strategy, 29(4), 41-50.
Lucas, M. R., & Rafferty, J. (2008). Cost analysis for pricing: exploring the gap between theory and practice. The British Accounting Review, 40, 148-160.
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