Tyra has done volunteer fundraising for years. She has recently decided it would be a good career move for her to become a full-time, paid fundraiser. She likes the idea of working with a variety of different organizations and then moving on to some new problem to tackle. She is trying to keep her operation simple. From what Tyra has told you so far, you understand that she plans on using cost-plus pricing. What problems do you foresee if she uses this pricing technique? What type of a pricing strategy might be more appropriate and simpler?

Question

What will be an ideal response?

Answer 1

One of the major problems with cost-based pricing is defining the units in which a service is purchased. Thus, the price per unit-a well-understood concept in pricing of manufactured goods-is a vague entity. So she would have to price by the hour and sometimes that becomes difficult with a service especially when there is a need to develop a rapport with the buyer(s). Costs are difficult to trace or calculate in service businesses, particularly where the firm provides multiple services. Fundraising covers a wide range of activities. Also, a major component of cost is employee time rather than materials and the value of people's time is not easy to calculate or estimate. An added difficulty is that actual service costs may under-represent the value of the service to the customer and therefore, the customer may think he or she is getting less for his money. Student answers to the second part of this question will vary but most should see how this situation would be appropriate for a penetration pricing strategy when she starts her new business, followed by contingency pricing strategy. This would allow Tyler to share the risks and rewards of delivering value to the customer.