What is special order pricing?
It is a process or technique used by many businesses when they have to calculate the lowest price of the services or products at which they are willing to accept the special order. This technique also tells the lowest price below which a business never accepts the special order. It is called special order because a business receives a special order from its clients and customers at the price which is usually lower than normal prices.
As a matter of fact, a business never accepts the special order at a lower price than the normal price if it can sell its product at the normal price. Therefore, there are some special circumstances in which special orders are accepted.
When are special orders accepted?
Businesses or service providers accept the special order at a lower price than the normal price when it has idle production capacity or when its revenue from the special order can be greater than the incremental costs.
A company usually accepts special orders when it is working at less than its usual capacity. In this scenario, a company has a lot of capacity to produce different products but it is not able to sell all those products. Then the company starts accepting the special orders from the customers.
Why the technique of special order pricing is practiced?
A special order is a one-time customer order because a customer places only once. The customer is allowed to order a large quantity at a low price than the normal price. A business chooses to sell its products at a special order when it has to choose between making money by selling products at a low price or completely losing money by selling no product at all.
What are the benefits of special order pricing?
Business always chooses the special order pricing technique in its every short term decision-making situation. There are many benefits that a business renders when it adopts the technique of special order pricing. Some of the very common benefits are:
It saves the cost:
Sometimes a business faces the excessive production capacity due to which, it produces the products which it is not able to sell. In this situation, a business can face a lot of monetary loss. To cope with this loss, a business can use the technique of special order pricing in an attempt to ensure that it at least covers the variable costs from the revenue from each output.
It is useful for customers:
The customers are sold the products at a lower price than the normal price which is beneficial for them. Most of the businesses start accepting the special order in the situation when the sale of the products is already deceased due to certain circumstances. For example, many businesses start accepting special orders at the end of the season when they want to sell all the seasonal products at the end of the season. Since the customers no longer need those products, the business has to sell them at a special order price.
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