Short Term Pricing Flashcards
Organisation Objectives which effects SR Pricing:
- Maximise profit?
- Increase market share?
- Max sales revenue?
- Quality supplier?
Whatever it is, FC must be covered.
What is Demand Influenced by?
- Price of good
- Price of other goods (substitutes/complementary)
- Household income
- Tastes/ fashions
What is Supply Influenced by?
- Goals of firm
- Price of commodity
- Price of FoP
- Technology
- Natural factors.
How are Prices Established by Companies?
Full Cost Plus Pricing -
Fully absorbed production cost + administration costs + selling & distribution costs
Marginal Cost Plus/Mark-Up Pricing -
* Marginal cost of production
* Marginal cost of sales
Rate of Return Pricing
Minimum Pricing
Contribution Approach
What is Full Cost Plus Pricing?
Sales Price = Full Cost + % Mark-Up
Mark-up % varies product-to-product, accounting for market conditions.
Advantages of Full Cost Plus Pricing:
- Covers all FC & make profit
- Simple, quick, cheap
- Flexible (% mark-up)
- Suitable if difficult to estimate D
Disadvantages of Full Cost Plus Pricing:
- Must cover non-production costs also
- Too simplistic
Advantages of Marginal Cost-Plus/Mark-Up Pricing:
- Simple & easy
- Mark-up can be adjusted to reflect market conditions
- Draws attention to contribution
- Convenient when there’s readily identifiable VC
Disadvantages of Marginal Cost-Plus/Mark-Up Pricing:
- Does not pay attention to demand conditions, competitor pricing or profit maximisation
- Ignores fixed OH, don’t know if they are being covered.
What is Rate of Return Pricing?
Aims to ensure company achieves particular target return on capital employed.
What is Minimum Pricing?
Price charged to cover incremental costs of production & sales, and, opportunity cost of resources consumed in relevant costs.
No profit.
No scarce resources or spare capacity, minimum price is incremental cost of making it.
If there are scarce resources, minimum price must include allowance for opportunity cost of using them.
What is Contribution Approach to “Optimal Pricing”?
Cost Analysis - identifies base (relevant) costs which price shouldn’t fall below.
Market Analysis: estimates selling price/volume relationship.
Cost/Volume/Profit Analysis: combines above to identify “optimal” price.
What are Price Setters?
Organisations sell differentiated products and have ability to set prices based on costs.
Have bargaining power.
What are Price Takers?
Organisation has little influence over price.
Large no. of firms, little to distinguish between offerings. Or…
Dominant market leader sets price.
How Does the SR affect Price Setting & Taking Firms?
Costs are fixed, no spare capacity.
Company has unused capacity & bidding for an oder, only use incremental costs.
