AMP 415 Week 8 Assignment CLC Pricing Decisions

                      

Grand Canyon University

Topic: Pricing Decisions

Class: AMP 415:  Financial Decision Making

Green Team: Mark Reid, Tracey Vest, Kevin Lincoln 11 and Joel Okere

With the rising demand of the latest and greatest in technology on the market, everyone wants to be up to date and have the newest and fastest electronic device on the market. When companies have to consider everything that people want, and  invest in the latest innovative products  and gadgets they do so with the intent to make significant profits from their investments. Technological advances have been on the demand with new  innovative and cutting edge products and one such product is the  I-phone 6 plus. There is so much that goes into this new and great device. The bigger question is how is it priced, and how likely will it sell based on the price and features. “In order to compete in today’s highly competitive marketplace supply chains must be engineered to match product characteristics and customer requirements. As products proceed through their life cycles these requirements dramatically change. Consequently supply chain strategies must be dynamically matched so as to maximize competitiveness. This demonstrates how innovative companies re-engineered its supply chain to accommodate the impact of product life cycles” (www.sciencedirect.com).  

 When it comes to cost-based pricing companies use the manufacturing or production costs as the foundation for setting the price. This is important for organizations and companies to understand but should not always be the default pricing strategy a company or organization should use to set prices for their products. It is important for organizations and companies to understand the cost-base because pricing should never be set below. However, there are situation that are more common whereas pricing could and should be set above the cost-based pricing level because of the products value to consumers and the market. This is also known as the market based approach. When it comes to the market based approach there are a few strategic implications that are considered when setting the price. These implications are the competition that offers similar products, the reliability of those products, and the features that are associated with those products.

When it comes to Apple INC., the best pricing approach for setting the product price is the market-based approach. Apple INC. offers a lot of value to its customer base through proprietary features and strategic partnerships that make differentiate Apples products from its competitors. “At a $100 premium compared to the regular iPhone 6, the iPhone 6 Plus will carry some juicy margins. Thanks to new estimates from experts in the marker it is believed that investors can get an idea of how profitable the new iPhone 6 Plus really is” (www. techinsights.com). From our estimation the component bill of material coupled with costs to manufacture is set at a price range of $200.00 for the regular sixteen GB IPhone 6 but when the IPhone 6 Plus  16 GB is considered the price jumps to $215.60. One can only imagine what the range would be for an IPhone 6 Plus with 32 GB.

In looking at possible cost structures and metrics we conclude that:

Metrics
IPhone 6 16 (GB)
IPhone 6 Plus (16 GB)
Manufacturing and BOM
(Bill of Material)
$200.00
$215.60
Retail Price
$649
$749
Implied Gross Margin ($)
$448.90
$533.40
Implied Gross Margin (%)
69%
71%

If we take into consideration the aggressiveness of Apple the margins and percentages gets even more brighter because of how the company utilizes storage pricing structure.. (Apple is resisting the broader trend among handset manufacturers to make 32 GB standard, and by keeping the entry-level models at 16 GB, it will encourage up sells to 64 GB and 128 GB models. The difference in cost between a 16 GB model and a 128 GB model is $47. Meanwhile, the difference in retail price is $200.” (www.fool.com/investing/general/2014/09/25/how-the-iphone).

Metrics
128 (GB) IPhone 6
128 (GB) IPhone 6 Plus
Bill of material and manufacturing
$247.10
$262.60
Retailing Price
$849
$949
Gross Margin Implied ($)
$601.90
$686.40
Gross Margin Implied (%)
71%
72%

We have therefore come to the conclusion and agree with the position of the experts that, “because Apple’s actual reported gross margin includes other costs beyond components, such as warranty expense and infrastructure depreciation, among others, each figure is important in different ways” (www.fool.com/investing/general/2014/09/25/how-the-iphone).Customers who purchase apple products are generally satisfied with its stability, efficiency, and quality. This adds a lot of value to the customer and entrepreneur. Apple would be limiting its profit margin and potential if the company made its pricing decisions solely on cost-based pricing. People are willing to pay more for the stability, reliability, sustainability, and quality of a product. 

The pricing of iPhone 6 plus should not be irrationally decided, for any phone, be it new with a wide variety of application or any ordinary phone with little or no tangible app, serious market research and data analysis should be carried out to ascertain how best to reach a price suitable for the phone. There are a lot of factors that must be considered during pricing decision and questions that must be answered.  These includes, the uniqueness of the phone; competitors similar product; advantages of the phone over other similar phones; current price of competitors product; the efficiency of the phone which include processor speed, storage capacity; hardware and software structures   will determine  the pricing approach of iPhone 6 plus.

Setting the wrong price on the phone on the one hand can to a large extent affect its market success because if the price is too high, buyers may not embrace the phone and rather go for other similar products from Samsung, LG, HTC or other phone producers. On the other hand, if the price is low compared to the similar existing products, it might implies inferiority to buyers, therefore the pricing approach for iPhone 6 plus is based primarily on a competitive basis, which is fixing the price in respect to similar prices that competitors charge on similar product, adopting the going rate pricing a form of competition based pricing. Apple being one of the market leaders will base the price of iPhone 6 plus on the current price of similar phones.

Companies use various means in order to appropriately set prices for products. Pricing decisions are nothing new but is critical in order for business to gain top profits on their products and services. Should companies chose to use the various pricing methods especially what is known as cost based pricing the intent is to establish prices within a certain percentage range  that is above any costs to manufacture the same product.   In looking at the ever popular I-Phone 6 plus we decided that it was essential that the price be set at the highest percentage level of $1400. We took into account  value based pricing because we considered the phone a valued product  that will bring invaluable benefits to those who chose to  purchase  the I-Phone 6 plus. The production costs to produce 150,000 I phone 6 plus at a cost of $400 per phone totals $80,000,000.00. We have to calculate each phone at the production stage and this would put us at $80,000,000 total manufacturing cost / 200,000 units production output = $400 product cost per unit. Based on the quality and added value of the IPhone 6 plus the market value would place the phone at $1400. There is no other phone on the market sufficiently comparable to the IPhone 6 plus with all its accompanying features and benefits to the customer.

Income Statement For IPhone 6 Plus Adapted

Sales Volumes
200,000

Per Unit                                             Totals
Sales Revenue
1400                                            154,000,000
Costs of goods sold expense*
(760)                                           83,600,000
Gross Margin
640                                             70,400,000
Variable Operating Expense
(300)                                           33,000,000
Margin
340                                              37,400,000
Fixed Operating Expenses
(195)                                          (21,450,000)
Earnings before Taxes and Interests
145                                              15,950,000

Interest  Expense
                                                      2,750,000

Earnings before taxes
                                                     13,200,000
Income Tax Expense
                                                     ( 4,488,000)
Net Income
                                                      8,712,000

Manufacturing Costs For IPhone 6 Plus 

Costs for Production
150,000 units
Authentic Output
120,000 units
Manufacturing costs component 
Per unit                                          Totals
Raw materials
215                                                 25,800,000
Direct labor
125                                                 15,000,000
Variable Manufacturing overhead costs
70                                                     8,400,000
Total Variable manufacturing costs
$410                                              $49,200,000
Fixed manufacturing overhead costs
350                                                  42,000,000
Total manufacturing costs
$760                                               $91,200,000
To 10,000 units increased inventory
                                                             7,600,000                                                                                                                                                                                                     
To 110,000 units sold*
                                                          83,600,000                                                                                                                          

Looking back on the I-phone 6 plus, it has a lot going for it. It has the latest and the greatest technology, longer battery life, and the internet is always at your fingertips. We have to base the price on not only what we are offering but we also had to take into account what kind of age group this product is gear towards. Also, we had to take into account that the price is competitive with other similar products that are currently out on the market. We conclude that the IPhone 6 plus with all its features and communication apparatus it is worth the price as it delivers the expectation buyers so desperately seeks.

 

References

Apple iPhone 6 / 6 Plus Teardown – TechInsights www.techinsights.com/teardown.com/apple-iphone-6: Retrieved June 2015.

Differences Between Value Based Pricing and Cost based Pricing http://smallbusiness.chron.com/differences-between-valuebased-pricing-costbased-pricing-23095.html Retrieved June, 2015.

How the iPhone 6 Plus Could Boost Apple, Inc.’s:www.fool.com/investing/general/2014/09/25/how-the-iphone: Retrieved June 2015.

Market Based Pricing Strategy: http://smallbusiness.chron.com/market-based-pricing-strategy-5121.html: Retrieved June2015.

Pricing Decisions In the Market Place www.sciencedirect.com: Retrieved June 2015

Why Cost Based Pricing Sucks:http://business.financialpost.com/executive/why-cost-based-pricing-sucks: Retrieved June 2015.