Module 3 : Pricing Decisions and Cost Management Flashcards
Major Factors Affecting Price Decisions
- Customers
-Competitors
-Costs
Customers
influence price through their effect on the demand for a product or service, based on factors such as product features and quality
Competitors
influence price through their technologies, plant capacities, and operating strategies which affect their costs
Costs
influence prices because they affect supply. The lower the cost of producing a product, the greater the quantity a firm is willing to supply
Another thing to determine the price
- Strategic objectives: long-run relationships with customers by establishing stable and predictive prices using the long-run pricing concept.
–> must know and manage their long-run costs, which includes all future direct and indirect costs
All this depends really of the market they operate in
- perfectly competitive market (wheat or rice) —> not able to increase their price because higher price will decrease demand immediately
- Less competitive market (camera or television) —> products are more differentiated, all 3 factors affect prices
Cost- Plus- Pricing: progressive in which way ?
bottom up progressive (page 20) –> look at the cost to define the price
Target pricing : definition
setting the selling price based on market conditions
Target costing : definition
managing the production cost to meet the profitability goals, considering the target price.
–> define a target price and then at the cost how to achieve to this target price
Cost-Plus Pricing
is a pricing strategy where a company determines the selling price of a product by adding a specific markup to its cost of production
Markup
calculated based on the target rate of return on investment but only serves as a starting point as it is flexible and ultimately determined by the behavior of customers and competitors.
when considering other companies with a different product offering, which method to use?
the cost-plus method may be at advantage. Such is the case for companies that provide many distinct services to their customers, such as accountants and management consultants.
Budgeted life-cycle costs
provide useful information for strategically evaluating pricing decisions. These two features of costs make life-cycle budgeting particularly important
Life- Cycle Budgeting and Pricing Decisions
- Research and Development
- Design of Products and Processes
- Production
- Marketing
- Distribution
- Customer Service
Which part of the Life Cycle Budgeting is the most long and costly ?
- R&D and Design
–> Many costs are locked in at the R&D and design stages, even if R&D and design costs are themselves small
