value from pricing Flashcards
pricing is where marketing and accounting join forces to
- incentivise customers to buy
- cover costs and create profit
pricing objectives
- revenue and profit
- operations; generate demand and use capacity
- patronage; encourage use
- non-monetary eg fair and equitable access, express core values
pricing tripod must balance
- value (and perceived) to customers
- cost of providing product
- pricing of competitors
pricing tripod determines
viable price range available to organisation
price ceiling
perceived value; customers will not pay more for a product than they think it’s worth
price floor
total cost of providing product; below that, organisation makes a loss
value pricing
basing price of products on value to chosen customers
value orientation
organisation’s focus firmly on value created for customers, and the process of capturing this value
true economic value
- cost of next best alternative + value of the performance differential
- value fully informed customer would ascribe to product and willing to pay
perceived value
- governs what customers are actually willing to pay
- lower than true economic value because customers not aware of all product benefits
marketing tries to…
- understand and shift what customers think a product is worth
- transform an uninformed customer (with low perceived value) into fully informed customer, shifting perceived value up towards true economic value
competition-based pricing
- monitoring competitors’ prices and acting accordingly
- shapes where in the viable price range between price floor (COGS) and price ceiling (perceived value) an organisation sets its price
competition intensifiers
increased competition and substitutes reduces upward pressure on prices
competition inhibitors
high switching costs and time/ location specificity drives prices up
cost per management accounting
- resources (in monetary terms given up to achieve a particular objective
- cost with future benefit = asset
- asset benefit consumed = expensed
cost behaviour
relationship with cost and level of organisation’s activity
cost behaviour helps
- predict costs; forecasting, budgeting, planning, CVP analysis
- manage costs; ensure they reflect value creation and increase profitability
to understand cost behaviour:
- cost driver; activity/factors that drive/cause costs
- cost object; item that management wants a separate measure of cost
cost behaviour patterns
- variable; changes proportionately with activity level
- fixed; does not vary with changes to activity level
- mixed; combination of fixed and variable
cost-volume-profit analysis helps managers determine
- changes in profit in response to changes in sale volumes, costs, and prices
- sales quantity required to break even and start creating value/profit
breakeven point
- sales quantity or revenue needed to cover costs
- no profit or loss
operational risk
risk of loss resulting from inadequate or failed internal processes, people and systems, or external events
margin of safety
expected future sales (in either revenue or units) above the breakeven point
value analysis
- identifies value adding and non-value adding activities/costs
- improves value of products by minimising non-value adding activities/costs
customer perspective of value-adding activities
- moves product step closer to completion
- produces change of state not achievable by preceding activities
organisation perspective of value-adding activities
essential to the functioning of the business
