Standard price

Standard price
See also
Cost per unit Market based price Criteria for selecting suppliers Target cost Finished product Cost calculation Cost oriented pricing Business segment Operating cycle

The standard price is the price for a semi-finished or finished product, obtained on the basis of a product calculation. It is a fixed price that does not take into account the movement of goods or the recording (booking) of the invoice and is used to price the goods .

Using the MM module

Price type assigned to material in the valuation area. For materials with such a price :

• all material movements are recorded on the basis of the standard price
• deviations from accounting prices are created, which are booked in a separate account
• price changes can be monitored.

Essence of the standard price

The standard price is the basic condition for the execution of a sale and purchase transaction in the market. Each company has to face the challenge of setting a price for its offer . It is about high stakes, because it is about the success of the product on the market, measured by the amount of demand for the product, and consequently about the company's market share and its profitability. Standard price is a key element the impact on the market . It contains very important information about the value of the product, its level of usefulness and its position among similar products offered by competitors. The importance of standard price as a means of competition in the services market is growing, because it is important to be aware that this is the only indication for the buyer to suggest the quality of the future service activity . Standard price is the only element of marketing-mix that creates revenue for the company, other elements generate only costs . For the customer, standard price is a cost factor, while the other elements of marketing-mix create benefits, create additional value for the buyer. No wonder, then, that the standard price is the basic price a factor in consumer choice . In economic terms, the standard price should provide the enterprise with a return on investment in the design and delivery of the service and a return on investment .

Standard Price Functions

Price is one of the basic economic categories. The notion of standard price is most often defined as the value of a commodity expressed in money. Prices perform the following interrelated functions :

• informative - prices enable market participants to operate an economic account. They are a carrier of information from the producer through intermediate levels of distribution channels to final buyers and vice versa, they enable the assessment of profitability of individual undertakings and their Comparison.
• Incentive - prices induce market players to behave in a way that is consistent with the information received.
• revenue allocation - prices determine the actual distribution of national income, they are an instrument through which both the state budget and production or commercial enterprises, as well as households, shape their revenues.

In marketing terms, price is defined as the value of an object (product or service) of a market transaction in line with the expectations of the buyer and seller, most often defined in monetary terms. As a mix marketing instrument, price performs the following functions :

• The aim of this tool is to distinguish itself from its competitors and to create a specific price image,
• regulatory - the price determines the volume of trading,
• cost - the price determines the level of costs.

Price managment strategy

A systemic approach to pricing is important in the strategy for price management in trading enterprises. The pricing process of a company consists of several stages . In order to choose a pricing strategy, traders should analyse both external factors - such as demand, competition, state pricing policy and internal factors related to the level of commercial costs . The setting of price levels is one of the most important decisions that will affect the financial results of trading activities both in the short term and in the long term. Pricing can take as its starting point either market conditions, i.e. demand- and competitor-oriented pricing, or company costs. In both cases, however, the policy objective is to price is to provide a profit to the company . In practice, it is traditional to use costs as a basis for establishing prices both because of the information on the level of the price covering costs and ensuring the desired profit and because of the methodological simplicity of this method . However, it is not possible to determine the price on the basis of cost alone and not to pay attention to demand and prices charged by competitors. Costs are determined only by the profitability of individual price proposals, however, the costs should be adjusted to the price determined on the basis of an analysis of other factors affecting its level .

The principle of perceived value

More and more companies see the value perceived by the customer as a key issue when calculating prices and apply the principle of value perceived by the customer. They use non-price variables from the marketing mix marketing mix to build up the perceived value in the eyes of the customer. The price is set so as to capture this value . Price calculation according to this principle works well with the product positioning process. The company creates the concept of a product of a specific quality and price for a specific target market, the target market . If the forecast profit from the sale of the product at the planned price and costs is satisfactory, the company continues to develop and market the product. There are two sub-methods of price calculation according to the principle of perceived value :

• valuation according to value-in-use price,
• determining the price according to the value of components (component-value pricing).

Component-value pricing gives the customer the opportunity to obtain several of the possible additional benefits and pay the price between the standard price and the higher price. The basic thing when calculating the price is to determine how the market perceives the value of an offer. It is therefore necessary to conduct a thorough market research . The principle of value pricing means that companies offer a low price for high quality products. Using this method involves a thorough reconstruction of the company in order to reduce its own costs .

Examples of Standard price

• The standard price of a car might include the manufacturer's suggested retail price (MSRP), which is the price that a customer will pay for the vehicle at the dealership. This does not include taxes, fees, or additional costs such as financing or extended warranties.
• The standard price of a gallon of gasoline typically includes taxes and the cost of transportation from the refinery to the gas station. It does not include additional fees, such as those charged for credit card use.
• The standard price of a computer usually includes the cost of the device as well as any software that is included in the package. It does not include any additional services, such as installation or technical support.

Advantages of Standard price

Standard pricing has many advantages for businesses. It allows them to ensure uniform pricing across all sales channels and show a consistent price to customers. Additionally, it simplifies the pricing process, eliminates guesswork, and helps businesses set competitive prices. Furthermore, it allows businesses to set a baseline price for products and therefore, plan their inventory and budgeting more efficiently. Additionally, it can help businesses identify and stop price wars among competitors. Finally, it helps businesses manage their pricing across multiple markets and countries.

Limitations of Standard price

Standard price has certain limitations, which include:

• The standard price is unable to take into account the cost of fluctuation in raw materials or labour, which can affect the cost of production.
• It also doesn’t take into account the cost of storage and transportation, which can add to the overall cost of the product.
• Moreover, it does not consider the cost of marketing and advertising, which can also affect the price of the product.
• The standard price does not take into account the cost of any delays in production, which can lead to a higher price.
• It also does not consider the cost of any quality issues, which may arise during the production process.

Other approaches related to Standard price

In addition to the standard price, other approaches related to pricing products include:

• Cost plus pricing, which involves factoring in the cost of production, materials and labor, as well as an additional percentage to account for profits.
• Market-based pricing, which is determined by looking at the prices of competitors and making adjustments based on market conditions.
• Value-based pricing, which is based on the perceived value of goods or services.
• Competitive pricing, which involves setting prices based on the lowest price offered by a competitor.

These approaches to pricing products, in addition to the standard price, offer a variety of options for businesses to determine the most appropriate pricing strategy for their products. By understanding the cost of production, market conditions, and the value of goods, businesses can make informed decisions about pricing that will optimize their profits.

Footnotes

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References

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• Hinterhuber, A., (2008), Customer value-based pricing strategies: Why companies resist. Journal of Business Strategy, 29(4), 41–50.
• Monroe, K.B., (2003), Pricing-Making Profitable Decisions 3rd Edition, McGraw Hill/Irwin, New York.
• Pettinger T., (2017), Role and Function of Price in Economy.
• Sammut-Bonnici T., Channon D. F., (2015), Pricing Strategy, Wiley Encyclopedia of Management, Publisher: John Wiley & Sons, Ltd.
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Author: Natalia Chowaniak