Chapter 14 lecture Pricing decisions and cost management Flashcards
4 P’s of the marketing department
- product
- price
- placement
- promotion
pricing ultimately comes down to economics:
supply and demand
3 major factors affecting supply and demand
- customers - customers influence price through their effect on the demand for a product or service, based on factors such as product features and quality
- competitors - competitors influence price through their technologies, plant capacities, and operating strategies which affect their costs
- costs - costs influence prices because they affect supply. the lower the cost of producing a product, the greater the quantity a firm is willing to supply
short run pricing decisions have a time horizon of
less than one year
- pricing a one time only special order with no long run implications
- adjusting product mix and output volume in a competitive market
short run pricing
long run pricing decisions have a time horizon of __________ and are intended to build long run relatinships with customers based on stable and predictable prices
more than one year
- reduces need for continuous tinkering of prices
- improves planning accuracy
- builds stable relationships with customer base
long run
long run pricing ocmpaniues must consider all costs along the
value chain
(-research and development
- design and products and processes
- production
- marketing
- distribution
- customer service)
typically, _____ costs comprise a substantial portion of the total cost associated with a cost object
indirect costs
these costs are allocated using a methodology which must be sound and free from material error in order to be useful to decision making
indirect costs
long run pricing approaches
- market based approach
- cost based approach
given what our customers want and how competitors wil react ot what we do, what price should we charge
which long run pricing approaches is this?
market based approach
given what it costs us to make this product, what price should we charge that will recooup our costs and achieve a target return on investment
which long run pricing approach is this?
cost based approach
4 steps of long run pricing approaches (market and cost based) market based approach: target costing
- develop a product that satisfies the needs of potential customers
- management needs to place to start the analysis. this is best done by choosing on intitial target price
- derive a target cost per unit by subtracting target operating income per unit from the target price
- perform value engineering to achieve target cost
the target price is estimated based on
- an understanding of customers perceived value for a product or service, and
- how competitors will price competing products or services
target cost per unit equation
target cost per unit =
target price - target operating income per unit from the target price
is a systenatuc evaluation of all aspects of the value chain with the objective of reducing costs and achieving a quality level that satisfies customers
value engineering
to implemtn value engineering, managers must distinguish _____ and costs from ______
- value added cost
- non value added cost
a cost that, if eliminated, would reduce the actual or perceived value or utilitu (usefulness) customers experience from using the product or service
value added cost
costs that, if eliminated would not reduce the actual or perceived value or utility of (usefulness) customers gain from using the product or service. it is a cost the customer is unwilling to pay for
non value added cost
when a resource is consumed (or benefit foregone) to meet a specific objective
cost incurrence
costs that, have not yet been incurred but will be incurred in the future based on decisions that have already been made
locked in (designed-in) costs
many or most costs are locked in pre production stages
which costs
primarily, direct and indirect manufacturing costs
arent usually locked in until incurred
marketing, distribution, and customer service oriented costs
the best opportunity to manage costs is before they are
locked in
to summarize the key steps in value engineering are
- understanding customer requirements and value added and non value added costs
- anticipating how costs are locked in before they are incurred
- using cross fucntional teams to redesign products and process to reduce costs while meeting customers needs
- employees may feel frustrated if they fail to attain targers
- the cross fucntional team may add too many deatures just to accommodate the differnet wishes of team members
- a product may be in development for a long time as the team repeatedly evaluates alternative designs
- organizational conflicts may develop as the burdern of cutting costs falls unequally on different business functions in the companys value chain
value engineering and target costing undesirable effects if managed unproperly
- encourage employee participation and celebrate small improvements toward achieving the target cost
- focus on the customer
- pay attention to schedules
- set cost cutting targets for all value chain functions to encourage a culture of teamwork and cooperation
how to avoid possible undesirable effects, of target costing
____ approaches generally involve:
1. calculating a cost base
2. applying a markup
cost based approach
estimating revenues and business function costs across the entire value chain for the entire product life cycle
life cycle budgeting
tracking and accumulating business function costs across the entire value chain for the entire product life cycle
life cycle costing
the practice of charging differnet customers different prices for the same product or service
price discrimination
the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service
peak load pricing
______ is permissible if differences in prices can be justified by differences in costs and
is illegal only if the intent is to lessen or prevenn competition
price discrimination
when a company deliberately prices below its costs in an effort to drive out competitors and restrict supply and then raises prices rather than enlarge demand
predatory pricing
most courts in the united states have define the ______ as the short run marginal or average variable costs
appropriate measure of costs
when companies in an industry conspire in their pricing and production decisions to achieve a price above the competitive price and so restrain trade
collusive pricing
