MA 14 Pricing Flashcards
What are relevant costs for short-term pricing horizons? Long-term?
Variable costs short-term. Fixed costs long-term because you can make changes to operations.
Define variable cost pricing. When is this good to use? When not?
A pricing model whereby sales price = variable costs + markup. Good in non-competitive markets as it covers the contribution margin. Not suitable where fixed costs are a large percentage of total costs as it may not recover all costs.
Define full absorption cost pricing. When is this good to use? When not?
A pricing model whereby sales price = total costs including fixed costs + markup. Used in GAAP, easy to calculate, ensure product set at a price that covers all costs. The downside is that is based on budgets which could be inaccurate. Doesn’t account for competition, an entity may turn down opportunities that still provide a positive contribution margin.
Name 5 stages of product life-cycle. When are 80-90% of costs incurred?
Development, introduction, growth, maturity, decline. Development.
Define target-based costs and the 5 steps taken to achieve
Organisation will set a target price they want to receive for their goods.
Step 1: Develop a product that satisfies the needs of potential customers.
Step 2: Choose a target price.
Step 3: Derive a target cost per unit by subtracting target operating income per unit from the target price.
Step 4: Perform cost analysis to target cost reduction.
Step 5: Perform value engineering to achieve target price, reducing costs and achieving desired quality levels.
Issues with cost based pricing
Based upon data - if this is inaccurate the pricing can be off
Can lead to death spiral - if sales price too high, fixed costs allocation increase which leads to higher sales price and less sales - need to take market conditions into account too, not just costs.
When is elastic demand pricing more prevalent?
In a competitive market
Predatory Pricing key points
- Deliberate price cutting or offers of “free gifts / products”
- Forces smaller / weaker rivals out of business or prevents new entrants
- Works in the short term but not in the long term
- Anti-competitive and illegal if it can be proven, but very difficult to prove
Penetration Pricing key points
- Price set to “penetrate the market”
- Low price to secure high volumes
- Intent is to lower costs over the long term by gaining production and distribution economies of scale before competitors
- Suitable for products with long product life
- May be useful if launching into a new market
Price skimming key points
- High price, limited volumes
- Short window of opportunity
- Suitable for products that have short life cycles or that will face competition at some point in the future (such as after a patent runs out)
Price bundling key points
- Offered when customers purchase more than one product or service from a company
- The more you buy, the less you pay
- Package deals
Peak-load pricing key points
- Prices adjusted to demand and volume
2. The higher the demand, the higher the price
Loss leader pricing key points
- Products sold below market price
- Customer draw to stimulate sales of more profitable goods or services
- Purchases of other items more than cover “loss” on item sold
Tender / contract pricing key points
- Proposal submitted for a contract / job
- Aims to cover materials and labour costs, and generate a profit
- Often undisclosed and in competitive markets
Value-based pricing key points
- Focuses on a single market segment
- Compares based on the next best alternative
- Focuses on differentiated features, not the brand
