Ch15 Pricing - overview

Question 1

Cost-based pricing

Answer 1

1. life-cycle costs - prices set to recuperate costs of product entire life
2. target-based costs - target price - suitable profit = target costs
3. cost-based contracts - prices are determined to reimburse costs + suitable margin
4. variable product costs - VC are marked up to set a price
5. full absorption costs - prices are set by marking up the full cost of productts (required for financial reporting) (all costs are recovered)

Issues with cost-based pricing:
1. make sure costs are properly captured
2. death spiral - situation when volume down, fixed costs per unit going up, leading to higher price, resulting in even less volume and more costs

Question 2

Demand-based pricing
(using demand to determine a perceived value)

Answer 2

Two focuses: value of customers & competition (demand)
1. predatory pricing: pricing low to forcing rivals out
(anti-trust competition - risk; works short-term)

2. penetration pricing: pricing low to gain market share or attract customers and raise it later once market gained) (long-term product life-cycle till gain economies of scale)
3. price-skimming: price higher for less volume (short-life cycle) - iPhone
4. price bundling: 1+ more, package deals
5. pead-load pricing: or congestion pring or surge pricing (the higher the demand, the higher price)
   Airline ticket
6. loss-leader pricing: selling one product below cost to stimulate sales of other more profitable products

Question 3

Value-based pricing

Answer 3

based on how customer’s perspective of value to Features or products

Question 4

Qualitative considerations for outsourcing

Answer 4

Pro:
1. profit maximization - cost saving
2. freeing up resources - incrasing overall capacity / efficiency

Cons:
1. quality
2. timely delivery
3. impact on internal process
4. reputation
5. long-term availability

Question 5

Offshoring - cost management

Answer 5

Pro:
1. increased productivity and responsiveness (different time zone)

Cons:
1. loss of control
2. transportation costs/risks
3. negative employee moral (job cuts)
4. quality
5. reputation tied to suppliers
6. ethical chalenges: human health, environment, livelihood needs of local people, compliance with various labour laws and human rights
7. political, currency, economic risks