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
What are the advantages of target costing
Advantages of target costing are:
- Focuses on market-driven pricing, which is competitive and customer-oriented
- Helps businesses control costs and improve efficiency
What are the disadvantages of target costing
Disadvantages of target costing are:
- Requires careful cost management and often drives companies to innovate to meet cost targets
- If costs exceed the target, businesses may need to adjust their design or processes to reduce costs
What are the different approaches to cost-plus pricing and target costing
- Cost plus pricing starts with the production cost and adds a fixed margin.
- Targeting cost starts with the target price and works backward to determine the maximum cost
What does measuring consumer profitability involve
Measuring consumer profitability involves evaluating the revenue and costs associated with individual customers to determine how profitable they are for the business
What does measuring consumer profitability help companies understand
Measuring consumer profitability helps companies understand which customers provide the most value and where resources should be allocated
Total revenue from customers =
TotalRevenuefromCustomer = PriceofEachPurchase × QuantityPurchased
What are some examples of direct costs
Direct costs can include:
- COGS
- Customer Acquisition Costs
- Customer Service Costs
- Shipping and Handling Costs
What are Customer Acquisition Costs
Customer Acquisition Costs (CAC): The costs associated with marketing, advertising, and sales efforts to acquire the customer
What are customer service costs
Customer Service Costs: The cost of servicing the customer
What type of cost is Account Management Costs
Account Management Costs is an indirect cost
What are Account Management Costs
Account Management Costs: If the customer requires dedicated resources
TotalCostsforCustomer=
TotalCostsforCustomer = COGS + CAC + ServiceCosts + ShippingCosts + AllocatedOverhead
Customer profitability =
CustomerProfitability = TotalRevenuefromCustomer − TotalCostsforCustomer
What can you group with customer profitability analysis
After calculating individual customer profitability, you can use Customer Profitability Analysis (CPA) to group customers based on their profitability levels
What is the customer lifetime value
Customer Lifetime Value (CLV), which estimates the total revenue a customer will generate over their entire relationship with the company, minus the costs incurred to serve them
CLV =
CLV = (AverageRevenueperCustomerperPeriod) × CustomerLifetime(inperiods) − TotalCoststoServetheCustomer
What does CLV factor in
CLV factors in:
- Retention Rate
- Gross Margin
- Discount Rate
What four categories can businesses segment there customers into
Businesses segment there customers into:
- Stars
- Cash Cows
- Problem Children
- Dogs
What are star customers like
Stars (High Profitability): These customers generate a lot of revenue and require reasonable or minimal service cost
What are cash cow customers like
Cash Cows (High Revenue, Low Cost): These customers generate significant revenue but require low servicing costs
what are problem children customers like
Problem Children (Low Profitability): These customers may cost more to service than they bring in, requiring intervention to reduce costs or improve sales
What are dog customers like
Dogs (Unprofitable): These customers should be reconsidered or possibly let go if they don’t contribute enough to justify the costs
