Pricing Flashcards
What are the three major influences on pricing decisions?
Costs, customers, and competitors
How relevant costs for pricing is determined?
Relevant costs for a producer’s pricing decisions are a function of the time horizon for pricing. for short-term such as special orders, relevant costs are those that differ between decision alternatives (typically variable costs)
for long term decisions, the analysis shifts, and quantitative tools such as capital budgeting can be utilized.
Summary of variable product costs pricing….
calculate the variable costs and apply markup on costs
Note: it is not recommended when the fixed costs are high
Summary of full absorption pricing ….
includes variable and fixed costs. it is easy to use because there is no need to split the costs.
Note 1: This is the method being used under GAAP
Note 2: downside of this method is that the pricing is based on budget which could be inaccurate.
Note 3: this method ignores competition and may result in an entity turning down opportunities
what are cost-based pricing methods?
1) variable product cost
2) full absorption
3) life-cycle costs
4) Target profit cost
what is life-cycle costs?
the life cycle of a product goes through five stages: development, introduction, growth, maturity, and decline. 80% to 90% of a product’s life cycle cost will be incurred during the pre-production stages. the price set for the product will try to recover these initial costs
Disadvantages of using cost-based pricing?
- information can quickly become outdated result in suboptimal decision
- death spiral: suppose the volume of sales for a company is falling for example as a result of a high selling price. as sales volumes fall, the amount of fixed cost allocated to each unit increases, leading to an even higher cost per unit which means that higher selling price and then the sales volume will be dropping even further.
what are the main focuses for demand-based pricing?
the value to customers and the demand (competition)
demand-based pricing uses consumer demand to determine a perceived value; this is the core focus of this pricing strategy
what is predatory pricing?
occurs when a company deliberately prices below its costs in an effort to drive out competitors.
what is penetration pricing?
Penetration pricing involves setting the prices low to attract customers and gain market share. its difference with predatory pricing is their goal is to attract customers not eliminating competitors.
what is price skimming?
goods are sold at higher prices initially so that fewer sales are needed to break even.
Note: it is usually employed to reimburse the cost of investment of the original research into the product ( like electronics market)
what is price bundling?
consists of offering several products or services for sales as one combined product.
Disadvantage: company sacrifice separate contribution margins
Advantage: to sell a product or service that customers don’t need / it prevents customers from picking some services from competitors
what is pick load pricing?
involves the practice of charging a higher price for the same product or service when demand approaches physical capacity.
what is loss leader pricing?
- products sold below market price
- customer draw to stimulate sales of more profitable goods and services
- purchases of other items more than cover loss on item sold
what is value based pricing?
Third general pricing strategy after cost-based and demand based.
is the practice of setting prices based on a trade-off between the perceived value to the consumer and the producer’s incentive to produce the product.
