Lecture 4 - Approaches to Pricing, focus on markets

Question 1

Comparisons of the 3 cost-based pricing methods: FCPP, MCPP and ABC.

Answer 1

FCPP:
Definition - Adds a markup to total cost
Strengths - Simple, ensures cost recovery.
Weaknesses - Doesn’t consider market demand or competition.

MCPP:
Definition - Adds a markup only to variable costs
Strengths - Helps with short-term pricing, good for price sensitive markets.
Weaknesses - ignores fixed costs, may not cover total expenses.

ABC:
Definition - Allocates costs based on actual activities
Strengths - More accurate cost allocation, useful for complex businesses.
Weaknesses - Expensive, time consuming

Question 2

3 key challenges:

Answer 2

Cost estimation - Difficulty in accurately predicting fixed and variable costs.

Price Rigidity - Businesses may struggle to adjust prices dynamically.

Market Disconnection - Ignores competitors pricing and the customers willingness to pay.

Question 3

Overview of 3 cost management strategies:

Answer 3

Lifecycle pricing - Adjust’s a products price over it’s entire life cycle, considering demand, competition and costs.

Target Costing - Determines a cost structure based on market price constraints.

Kaizen - focuses on continuous improvement and incremental cost reductions.

Question 4

What is Life cycle pricing?

Answer 4

• Adjust’s prices throughout the product’s life cycle to maximise revenue and remain competitive.
• Prices change based on market demand, competition and production costs.

5 stages:
- Development
- Intro
- Growth
- Maturity
- Decline.

Question 5

What is Target Costing?

Answer 5

• An approach influenced by market pricing.
• It combines 3 elements: cost, competitors and customers.
• Method involves analysing the market, customer needs and wants in order to define a target price.
• Business set a target cost of producing goods/services to then ensure a profit when they sell at the target price.

Question 6

What is Kaizen?

Answer 6

• Japanese method
• Emphasis on continuous improvement in operations.
• Implement efficiency change which will reduce costs.

Question 7

4 different Pricing strategies:

Answer 7

• Market skimming pricing
• Premium Pricing
• Value Pricing
• Perfect Competition

Question 8

What is Market Skimming Pricing?

Answer 8

• High price, gradually lower over time.
• Works best for new technology products with limited competition.
• Helps firms recover R and D costs, and maximize initial profits.
• Is a form of price discrimination.

Question 9

What is Premium Pricing?

Answer 9

• Charging a higher price than the market average.
• Customers must be convinced they are getting better quality and greater added value to justify the higher price.

Question 10

What is Value Pricing?

Answer 10

• Selling a Product which is of similar quality to competitors but for a lower price.
• Attract customers by offering better value, and undercutting competitors.

Question 11

What is Competitive Pricing strategy/Perfect competition?

Answer 11

• Pricing at the going market rate.