Pricing decisions Flashcards
State the factors to consider in pricing
- Objective & size of the entity
- Expected Market share of product / sector / industry / competitors
- prices
- Price taker? / Price setter? (Price elasticity of demand
- Influenced by:
- Product lifecycle (new or old product?)
- Quality / brand / reputation
- Marketing (marketing and selling approach – how accessible is product?)
- Pricing strategy and price sensitivity
- Costs
- Legislation (maybe regulated or certification required to operate)
- Timing: short term / long term
What factors determine an organization as a price setter?
◾Determines the price
◾Monopolists / market leaders:
Keep price high and supply low
◾Custom / unique products
◾Clients cannot leave to another
supplier or use another product
◾Some discretion in setting SP
◾Cost based pricing approach best
in this case
What factors determine an organization as a price taker?
◾Little or no influence over SP
◾Market determines price based on supply and demand
◾Many firms, similarproducts, competitive
◾Cost information important
- Product mix decisions
- Marketing
State the different types of pricing methods
- Economist’s model
- Cost based pricing models
- Target costing
- Pricing strategies
- Price skimming policy
- Penetration pricing policy
What are the short comings of economist’s model?
- Difficult to use in practice. Three groups of difficulties:
- Assumption that firms can estimate the demand curve:
- Market reactions unpredictable
- Companies produce multiple products that impact demand
- Competitor information is not always readily available
- Assumption that only price influences demand (demand is driven by price – lower price = higher demand)
- Quality, packaging, advertising, credit terms etc. is not considered.
- Marginal cost curve per individual product is difficult to determine
- The use of Economist’s model may lead to profit maximisation at the expense of other strategies and objectives
What are the cost based pricing methods?
a) Total manufacturing costs + margin
b) Total costs + margin
c) Relevant costs + margin
d) Variable cost + margin
e) ABC cost + margin
f) Target mark-up percentages
What are the limitations of cost based pricing methods?
◾ Market demand ignored
◾ Assigned fixed cost is not actual cost
◾ Cost-based pricing does not shield the seller from a loss (depends on activity levels)
What are the advantages of cost based pricing methods?
◾ Price stability (industry wide cost structure)
◾ Availability of information
◾ Adjustments by management
◾ Simple to use
What is target costing?
A technique that focuses on managing costs during a product’s planning and design phase by establishing the target cost for a product or service that is derived from starting with the target selling price and deducting a desired profit margin
Define the term price setters
Companies that have the discretion over setting price of their products or services
Define the term price takers
Companies that have little or no influence over setting price of their products or services
Define the term price-skimming policy
An approach to pricing that attempts to exploit sections of the market that are relatively insensitive to price changes
True or false
◾ Skimming means going from high to low. Start with a high price to get the early adopters and
then gradually reduce. This happens in relatively price insensitive markets ie. Price and demand
inelastic (eg. technology).
True
What are the advantages of price skimming?
Advantages:
◾ Covers unforeseen cost increases
◾ Safeguards against decrease in demand after novelty wears off
Disclose the disadvantage of price skimming
High risk of competition
