12. Pricing Decisions Flashcards
What are the 4 types of cost that can be used as a starting point for pricing decisions?
- Marginal Cost
- Relevant Cost
- Full Absorption Cost (or ABC)
- Standard Cost
What are the pros and cons of using marginal costing as the starting point for pricing decisions?
Pros: Minimum price when spare capacity, one off orders
Cons: Fixed costs must be covered in the long term
What are the benefits of using relevant costing as the starting point for pricing decisions?
- Incorporates opportunity cost
- Good when resources are scarce
- Good for setting minimum price
What are the pros and cons of using absorption costing as the starting point for pricing decisions?
Pros: Covers all short term and long term costs (assuming budgeted demand achieved), quick and cheap method
Cons: Need to ensure customers are happy to pay the price and that OAR bases are fair
What are the benefits of using standard costing as the starting point for pricing decisions?
- Allows set selling price to be kept stable
- Internal inefficiency borne by business, not consumer
What is a criticism of all popular pricing methods?
Do not focus enough on what the consumer is willing to pay
When using mark-up, what element is taken as 100%?
Cost
When using margin, what element is taken as 100%?
Selling Price
What 3 things might a company consider when selecting the appropriate margin or markup?
- What is the target ROCE for the company?
- What are the competitor’s prices?
- What margins are obtained on similar products?
How can big data help determine product mix? (6)
- Customer information and behaviours more transparent and accessible
- Can test scenarios to minimize risk
- More potential for customer segmentation
- Reveal new insights into customers
- Help faster time to market
- Help develop non-financial performance indicators
