Lecture 2.4 - Pricing decisions Flashcards
Price takers
Little or no influence over the prices of their products in the market
Many firms in the market
Little to distinguish products
Price setters
Some discretion in setting prices
Firms are market leaders
Influenced by how customers value the product
Selling highly differentiated or customised products
3 major C’s when an organisation is setting their prices
Costs
Customers
Competition
Other influences on organisations when setting their prices
Strategy
Restrictions
Product life cycle
Elasticity
Measures the relationship between prices and demand
= % change in Q
———————–
% change in P
Influences on elasticity of demand
Disposable income
Availability of substitutes
Time
3 pricing methods
Cost plus pricing
Target pricing
Market based pricing
Cost plus pricing
How much does the product cost and how much mark up will I add?
Full cost plus mark up
Useful when impossible to estimate demand
Advantages of cost plus pricing
Quick and easy
Factual and precise
Price stability
Cost plus pricing limitations
Ignores demand and competitors
Doesn’t maximise revenue
Based on past data
Target costing and pricing
Target price is estimated price customers will be willing to pay to achieve market sales and shares
Required profit margin is deducted from target price leaving the maximum allowable product cost
Market based pricing
Best suited to non customised products
Large homogenous products sold to many customers
3 types of pricing strategies
Price skimming
Penetration pricing
Discrimination pricing
4 Types of pricing tools
Price bundling
Price unbundling
Discounting
Versioning
