Lecture 3 pricing etc Flashcards
what is the accountants approach to pricing
cost based,
aim to recover costs,
cost-plus pricing commonly used
what is an economists approach to pricing
demand-based,
requires perfect information about cost and revenue functions,
attempts to find optimal profit-maximising selling price and output level
what is the problem with the economists approach to pricing of finding the profit maximising equilibrium using demand curves
in real world it is difficult and costly to find accurate information about the market
what does the demand curve measure
the demand curve measures the relationship between selling price and sales volume
what factors other than price is demand driven by
marketing quality of product service levels level of competition competitors prices product life cycle (can buy old ones cheaper)
what do you ignore for relevant costing
sunk costs,
non cash flows,
committed costs,
common costs
what do you include for relevant costing
opportunity costs / revenues
what other things need to be taken into account when making relevant costing decisions
prestige/reputation, staff morale, long term strategy, effect on rest of business, relationship with customers
what does roce stand for
return on capital employed
what are the pricing objectives
target ROCE (cost oriented, return on capital employed), market share, sales revenue, stable prices, stable output volumes, match competition, profit max
what are some of the factors affecting selling prices
costs, competitors and markets, monopoly, oligopoly, profit life cycle
what are some factors that influence demand
advertising and promotions,
price,
price of substitutes,
consumer taste
what are some practical pricing methods
cost plus pricing, price skimming, price penetration, product line pricing, perceived value
what is cost plus pricing
based on estimates of TAC (total absorption costing),
may be based on MC,
opportunity costs can be used for one off decisions
what are some advantages of cost plus pricing
justifies a price increase,
easy to implement,
ensures profit is reached if volume achieved,
more practical than MC=MR due to costs involved in assessing demand
why is cost plus pricing seen as more practical than MC=MR think about it
more practical than MC=MR due to costs involved in assessing demand
what are some disadvantages of cost plus pricing
ignores competition/demand,
requires cost apportionment if multiple products,
does not motivate cost control,
vicious circle leading to increased prices
what is price skimming
product quality leadership justifies high initial price, may be followed by lower price, requires technical barriers to entry, needs inelastic demand, needs few scale economies
what is price penetration
low prices aiming for market share,
high volumes reduce cost (FOAR),
requires price sensitive market (elasticity),
competitors will not match as price too low,
what is the link with price penetration and loss leader
may use price penetration to promote related products (loss-leaders)
what is product line pricing
range of complementary products,
captive products (following on from primary product),
related optional products,
product bundling
what is perceived value pricing
identify the customer product is aimed at,
put yourself in their place
what is going-rate pricing
price at industry average,
good in established perfectly competitive market
what is price discrimination
essentially produce a single product and sell at 2 or more different prices,
create 2 or more separate markets (eg home and export),
requires no arbitrage different demand curves and degree of monopoly
