Business Paper 3 Flashcards
What is cost-plus pricing?
> adding a mark-up (usually at least 100% in retail) on top of the cost of production of the product
What is price skimming?
> charging a high price to attract initial enthusiast buyers, then lowering the price as time passes, or competitors enter the market
For which type of product is price-skimming used?
> innovative products
How are unit costs calculated?
Total costs/Number of units
What is competitive pricing?
> charging at market level, or a discount to the market
e.g. Branston charging 65p, whereas Heinz (market leader), charging 75p
What is competitive pricing?
> charging at market level, or a discount to the market
e.g. Branston charging 65p, whereas Heinz (market leader), charging 75p
What is the implication for businesses using competitive pricing?
> they have no real control over their future revenues
What is predatory pricing?
> charging below the cost of production, with the intention of forcing a rival out of the market
What are the prerequisites for successful predatory pricing?
> Predator business is strong financially
or
Prey business is weak financially
What is psychological pricing?
> pricing below round numbers (e.g. charging £0.99 instead of £1.00), in an attempt to entice customers
What time span are pricing TACTICS?
Pricing TACTICS = short-term
What is a price sensitive market?
> A market in which demand is highly elastic
Which factors determine appropriate pricing strategy?
>Product differentiation >Price elasticity >Strength of brand >Amount of competition >Stage in product life cycle
Which businesses mainly use cost-plus pricing?
> Businesses with strong brands and inelastic demand for products
What is the formula for Cost-plus?
Unit cost + (% mark up)
What should we consider in
‘Changes in price to reflect social trends?’
> Online sales (e.g. Amazon undercutting highstreet sellers)
>Price comparison sites (often just looking for commission, rather than showing the consumer the best deal)
What is investment appraisal?
> using forecast cash flows to estimate the value of an investment decision based on quantitative criteria, then backing up calculations with an assessment of non-financial factors
What does the payback period focus on?
> (Solely) how long it takes to repay the business’ initial outlay
What is the formula for Payback period?
> Payback = Initial outlay/net cash flow
What is the formula for REMAINING payback period?
> Outlay outstanding (from cumulative cash flow)/monthly net cash flow in year of payback
What are the three steps in calculating ARR?
- ) Total net cash flow - Initial outlay
- ) /Number of years of project
3) (Average annual profit/initial outlay) x 100
What does Net Present Value (NPV) do?
> Considers the future value of cash in today’s terms (accounts for both time risks and opportunity cost of cash)
How is NPV calculated?
1) Net cash flow x discount factor
2) Total = NPV
What are the general limitations of Investment Appraisal techniques?
Further ahead cash flows are projected > greater likelihood of inaccuracies
Quantitative investment appraisal methods fail to account for important qualitative factors
Data may be biased (e.g. calculated with an agenda, e.g. appeasing management)
