Lecture 6 Flashcards
What are some key factors at how companies arrive at pricing decisions
Some key factors for consumers arriving at pricing decisions are:
- Cost based pricing
- Market based pricing
- Value based pricing
What is cost based pricing
Cost based pricing is where the company calculates the costs then adds some more on so that all costs are covered and profit is made
What do companies do when using market-based pricing
When using market based pricing companies look at market conditions and competitor analysis
What is competitor analysis
Competitor analysis is where companies assess the prices of competitors offering similar products or services
How can supply and demand impact pricing decisions
In periods of high demand prices may increase
What is value based pricing
Value based pricing is when companies price products based on the perceived value of the customer
What is targeted pricing
Targeted pricing is where companies charge different prices for different market segments based on their ability to pay or their needs
What is psychological pricing
Prices are often set at psychological thresholds, like $9.99 instead of $10
What do companies do to prices in times of inflation
In times of inflation businesses may raise prices to maintain their profit margins as the cost of raw materials, labour, and overhead increases
What do companies do to prices in times of deflation
With deflation companies may reduce prices to make the product more affordable
What might happen to consumer spending during times of high interest rates
When interest rates are high, consumer spending may decrease as borrowing becomes more expensive
What can rising income levels lead to
When consumer incomes are rising, people may be willing to pay higher prices for goods and services
What can advancements in technology do to price
Advances in technology can lower production costs, allowing businesses to reduce prices while maintaining profitability
How can taxes and tariffs affect price
Government-imposed taxes, import duties, or tariffs can affect the cost of production or importing goods, which may result in price increases
How can price controls impact price
In some industries, government regulations may impose price controls, such as caps on essential goods to protect consumers from excessively high prices
What is cost plus pricing
Cost plus pricing refers to setting the selling price of a product by adding a fixed percentage to the cost of producing or acquiring the product
How does cost plus pricing work
Cost plus pricing works as:
- The business calculates the cost to produce or acquire the product
- Then, it adds a markup percentage to that cost to determine the final selling price
What is the formula for cost plus pricing
SellingPrice=CostofProduction+(MarkupPercentage × CostofProduction)
What are the advantages of cost-plus pricing
Advantages of cost plus pricing is:
- Simple and straightforward to calculate
- Ensures that all costs are covered and a profit margin is achieved
What are the disadvantages of cost plus pricing
Disadvantages of cost plus pricing are:
- Does not take into account competitive pricing or customer demand
- The markup is fixed, regardless of market conditions
What is target costing
Target costing is a pricing strategy that involves determining the desired profit margin and competitive price first, and then working backward to identify the maximum allowable cost for production
What is target cost focused in controlling
Target costing is focused on controlling costs to meet a predetermined price and profit goal
How does target costing work
Target costing works:
- The company starts by setting a target price based on market research, competitive pricing, or customer expectations
- From this, it subtracts the desired profit margin to calculate the target cost
Target cost =
TargetCost=TargetPrice−DesiredProfitMargin
