Pricing decisions Flashcards
What are the two main management approaches that pricing decisions follow?
Cost-based approach & Market-based approach.
What is the cost-based approach?
Pricing is focused on the cost of producing a product and then adding a mark-up to make a profit.
What is a market-based approach?
Pricing decision based on the market factors and customers wants.
What are both approaches influenced by?
Costs, customers, competition and legal/political and ethical issues.
How do customers influence pricing decisions?
Demand
What is customers’ demand driven by?
- Product design
- Product quality
- Product’s carbon footprint
- The social values and ethical principles of the company.
What is one way that market competition can influence price-setting?
Competition can force companies to lower their prices than anticipated.
What is one way that legal, political and ethical issues can influence price-setting?
Businesses are prohibited from engaging in price collusion, among other bad pricing practices.
Cost based price =
cost + mark-up
Mark-up =
(selling price - cost) ÷ cost
What are the various cost-bases that can be used when applying the cost-base approach?
- Variable manufacturing cost
- Total variable cost (including non-manufacturing variable costs)
- Manufacturing costs (includes variable and fixed)
- Full cost of the product.
What is the most popular cost-base used in cost-based pricing?
Full cost because it is very simple to use and apply and allows for full recovery of production costs
What are market prices determined by?
Supply and demand.
What are market prices influenced by?
The degree of product differentiation and competition.
What is the price elasticity of demand?
The sensitivity of consumer demand to changes in price (as prices increase, demand falls).
What is target pricing?
A pricing strategy that helps companies determine the price at which they can sell a product based on market conditions and customer expectations.
Which pricing approach is more common and why?
Cost-based pricing because prices are calculated from readily available cost data.
What is a drawback of cost-based pricing?
It ignores customer demand and sales volumes can inappropriately influence price
Benefits of market-based pricing:
lead to better decisions about sales volumes.
What is a drawback of market-based pricing?
Difficult to estimate market demand and prices
What is peak load pricing?
The practice of charging different prices at different times to reduce capacity constraints.
What is price skimming?
Occurs when a higher price is charged when product or service is first introduced
What is penetration pricing?
Setting low prices when new products are introduced to increase market share.
What is price gouging?
The practice of charging a price viewed by customers as too high or unreasonable e.g. taking advantage of a bad situation to make as much money as possible (unethical)
What are transfer prices?
Prices charged for transactions that take place within an entity.
Prices in not-for-profit entities may be variable and based on:
- variable pricing depending on client’s income (sliding scale)
- achieving organisational goals.
When would governments intervene in pricing practices?
- Price discrimination
- Predatory pricing
- Collusive pricing
- Dumping
What do plans provide?
A benchmark against which future performance can be assessed then the difference is called variance.
What is the control phase of operations?
Comparing actual performance with plans, and determining the reason for any variance.
Plans should provide targets that are:
[SMART]
- Specific
- Measurable
- Achievable
- Realistic
- Time-bound
What is the accountant’s role in planning?
Framing business models e.g. targets, KPI’s, budgets, reports and analysis
What are the 5 components of planning?
- Identifying the problem
- Collecting the relevant information
- Determining alternative courses of action.
- Evaluating alternatives
- Making a decisions
What is sustainable development?
Development that meets the needs of the present world without compromising the ability of future generations to meet their own needs.
What pressures might encourage managers to prioritise short-term planning?
- Short term bonus plans;
- Yearly calculation of ‘profit’
