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Tutorial Presentation for textbook question- Kustom Cupcakes analysis...

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1. From a firm’s perspective, successful pricing strategies that help create customer value are influenced by the five Cs of pricing. Each can potentially affect how firms determine their price level. Briefly explain each of the factors and how these affected Kustom Cupcakes’ approach to pricing. If it still operated, would you have suggested it change the relative influence of the five Cs within its pricing strategy? Explain.

The five C’s of pricing include company objectives, customers, costs, competition and channel members. Company objectives are the ultimate goals in which the company aims to achieve. There are four common company objectives; profit oriented, which focuses on target profit pricing, maximising profit or target return pricing, sales oriented, whereby the price is set low to generate high sales and attract consumer attention, competitor oriented, which aims to discourage new competitors from entering their market through price, and customer oriented, which focuses on the quality of the product. Therefore, in relation to this case study, Kustom cupcakes were established as a business which was primarily consumer oriented, as they were evidently passionate about their operation and aimed to present high quality cupcakes to the consumers. Due to this higher level of quality, Kustom cupcakes employed premium pricing, ultimately setting their prices above their competitors.

After establishing company objectives, understanding the customers reactions is important to provide value in regard to pricing. Consumers seek a fair return in goods or services for their money, therefore proving that value is vital. Kustom Cupcakes provided high quality goods as they were delivered, individually decorated and displayed daily, therefore ensuring freshness. Further, Kustom cupcakes also guaranteed ingredients which were of the highest quality. Hence, their pricing was made to be above standard cupcakes and other competitors.

An understanding of their cost structure is vital for firms to determine the profitability of their goods and services at ranging prices. However, it may be deemed difficult as consumers will not consider the cost of production aspect, therefore indicating that prices should not be solely based on costs.

The fixed costs of Kustom Cupcakes included their rent and general utilities, such as water, electricity, and gas, to run their business. However, their small store, which was approximately 100 squared metres, kept the rent costs relatively low. The variable costs of Kustom Cupcakes included their labour wages, advertising costs and their ingredients. The labour wages were kept minimal, as they worked in a small store and only employed 6 staff members. Further, their advertising costs were also kept low as they depended on word of mouth, rather than media advertisements. However, due to their higher quality of goods, the costs of their ingredients were also high.

The pricing strategies of a firm will inevitably be influenced by their competition. There are four levels of competition; monopoly, which is where one firm controls the market, oligopoly, where a handful of firms control the market, monopolistic competition, which is where many firms sell different goods at different prices, and pure competition, which is many firms selling different goods at the same price. However, competition was not a major aspect to consider when allocating pricing strategies for Kustom Cupcakes due to their unique competitive position in Perth and lack of competitors.

Channel members consist of the retailers, manufacturers and wholesalers and can oftentimes have different perspectives in regard to pricing due to their distinct goals. An example of this conflict is that manufacturers may want to raise prices to establish a higher-quality brand reputation, whereas retailers may want to keep relatively low prices to sell higher volume of product. For Kustom Cupcakes, they were a boutique retailer, thus indicating that they were both the manufacturers and the retailers, and ultimately leading in no conflict with pricing strategies.

If Kustom Cupcakes were still operating, due to the success of their business, other entities may attempt to mimic their business operational manners and adopt the same methods and services which Kustom cupcakes provides, meaning there will be a major increase in competitors and ultimately a loss in their unique position in that market. Therefore, I believe transitioning into a competitor-oriented company objective would be beneficial for their business to remain relevant and successful.

Further, by remaining knowledgeable on the interests of their customers, and their perceptions of what good value is, Kustom cupcakes can adhere to the changing nature of consumer preferences and demands.

Kustom Cupcakes evidently focused on high quality goods which inevitably was the reasoning behind their premium pricing for their products. Analyse the effectiveness of this decision and briefly discuss other pricing methods which the business may have appropriated....