Pricing strategies Flashcards
What are price takers?
Companies that have little control over the prices of their products/ services.
Price is set by the market
Special orders = company can use relevant costing.
Target costing
What are price setters?
Companies can set the price for products/ services.
Must understand what the cost of each product is, company can choose ABC for this.
If product is customised, company may use cost plus pricing.
Special orders = relevant costing
What is price elasticity of demand?
Measures the responsiveness of the change in demand as a result of a change in price.
What is price elastic?
Price change creates LARGE change in demand
What is price inelastic?
Price change creates SMALL change in demand
How do you calculate PED?
(change in demand) / (change in price)
What are the factors affecting PED?
- no. of substitutes
- branding
- income (% of income spent on the product)
- who is buying the product
What are the price strategies?
Cost plus
Loss leaders
Complementary pricing
Price discrimination
Market pricing/ target costing
Market penetration
Relevant cost pricing/ minimum cost pricing
Market skimming
What is cost plus pricing?
Selling price is determined by adding a fixed percentage to production cost (total cost + fixed % = price)
Only uses unit cost, doesn’t look at market conditions or competitors prices so may not be useful.
Used when there is a variation of products so different markup costs can be added to different items.
What is loss leaders?
Products are sold at a loss to attract customers (is a marketing strategy) and get them to buy other more profitable products.
Used when joining new markets and want to gain market share.
May lead to a perception that the products are low quality and so may not attract customers.
What is complementary pricing?
Setting the price for one product to increase demand for a related product.
Aim to maximise profit from both products.
Set one product low to boost the sale of the complementary higher priced item.
What is price discrimination?
Where businesses charge different customers different prices for the same product.
Business will segment their market based on certain attributes, each segment is charged a different price.
Used to profit maximise, can profit from different demands + supply.
Used to achieve economies of scale, increase sales and production.
1st degree = charge the maximum price a customer will pay for each segment
2nd degree = discounts for bulk buying
3rd degree = different prices for different people
What is market pricing/ target costing?
Setting prices based on market conditions and a desired profit margin.
- set a target price
- calculate the target cost (target price -desired profit margin)
- design product to meet target cost
- control costs
Used in industries with high competition (price takers)
Offers competitive pricing as helps keep costs under control.
What is market penetration?
Setting a low price for products at the beginning to quickly gain market share.
Goal is to attract customers and establish product as market leader.
Aims to impress customers so they stick and spend more over time.
Used when:
- entering a new market
- launching a new product
- competition is high
What is relevant cost pricing/ minimum cost pricing?
Focuses on costs that are relevant to a specific business decision.
Relevant costs = future costs that vary depending on the decision being made.
Used to identify/ analyse costs that change if a specific decision is made.
