Oelrich Builders builds townhomes in a new subdivision just outside of Alachua.
ID: 2583357 • Letter: O
Question
Oelrich Builders builds townhomes in a new subdivision just outside of Alachua. Land and labour are cheap, and competition among developers is fierce. The homes in the subdivision
are identical to one another, but buyers can upgrade features by paying the difference.
Which approach to pricing should Oelrich Builders emphasize? Why?
Oelrich will need to emphasize a( cost-plus or target-costing ) approach to pricing. Because the tract homes are( not unique and face or unique and do not face ) stiff competition, Oelrich will (have a lot of or not have much ) control over pricing.
Explanation / Answer
The following are some key factors influencing Pricing decisions for any firm
1. Customer Demand : especially a customer's willingness to pay for a product
2. Competitor Actions : Likely decisions of competitors and its impact on a firm's pricing
3. Costs : Critical to factor cost components to also ensure quality doesnt fall below defined standards
4. Political, Legal, Brand related issues : Factors influencing the overall positioning of a firm in the industry
In the case of Oelrich, the competition is fierce and the houses are very identical, it can be established that Oelrich is in a very competitive market where the customer demand can be influenced by the price. Also since Land and labour is cheap, the cost to create the houses can be controlled to an extent. Moreover, the customisation to houses can be left to the customers (at extra cost). Hence, keeping all this in context it would be advisable for Oelrich to adopt a Target costing approach to pricing.
Pros and Cons of Target Costing;
Pros:
a. Building efficiency in processes in order to cut costs
b. Competing with Market efficiently and gaining the maximum share possible
Cons:
a. Building of a Low cost image in the market makes it difficult to penetrate the premium market.
b. Stress on cost reduction leads to employee dissatisfaction and material quality compromises (can be maintained by better HR policies and better Quality checks)
Oelrich will need to emphasize a target-costing approach to pricing. Because the tract homes are not unique and face stiff competition, Oelrich will not have much control over pricing
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