MA: Pricing

2 pricing approaches: practical/ accountants (most used)

cost based (TAC)/ cost-plus/ price-setter (ST/LT pricing decisions)/ price-taker (ST/LT product mix decisions)

1 of 16

2 pricing approaches: theoretical/ economists (demand)

demand based (MR=MC)/ requires perfect info on cost + revenue functions/ find optimal profit-max selling price + output level

2 of 16

theoretical approach: profit maximising (4 steps)

(1) find equation of demand curve (solving 2 unknowns) (2) find revenue equation (3) set MR=MC to find profit-max point (derivatives) (4) profit = TR - TC

3 of 16

theoretical approach: assumptions

(1) demand curves are linear (2) demand curves are accurate (3) VC linear increase + FC same for all output

4 of 16

(4) Other factors influencing demand (not just price)

(1) Company (advertising/ service levels/ complementary goods) (2) Competitors (competition level/ prices) (3) Customers (taste/ trend) (4) Product (quality/ stage in lifecycle)

5 of 16

(6) pricing objectives

(1) Target ROI/ ROCE (2) Target market share (3) Target sales revenue (4) Stable prices/ output volumes (5) match competition (6) profit maximisation (theoretical)

6 of 16

factors affecting selling prices

(1) company (costs definition + economies/ spare capacity/ overall strategy other products) (2) competitors (perfect comp/ monopolist comp/ monopoly/ oligopoly) (3) customers (demand elasticity) (4) product (lifecycle (4 stages)/ substitutes)

7 of 16

Practical pricing methods: (1) Cost-plus +ves/-ves

TAC cost + markup (if no spare capacity use opportunity costs)/ +ves: justifies increase/ good if new product/ easy to implement/ ensures profit (if vol. reached)/ -ves: ignores comp./ demand/ no cost control/ viscous cycle (vol=FC pu=cost=price=dem)

8 of 16

Practical pricing methods: (2) Price skimming (demand) +ves/ -ves

high quality justifies high initial price (may be followed by lower after fulfilled customers) +ves: market monopoly/ high profits low volume -ves: requires: tech barriers to entry/ patents/ inelasticity/ few scale economies/ short product life-cycle

9 of 16

Practical pricing methods: (3) Price penetration (demand) +ves/ -ves

low price to capture market share (loss leaders attract) +ves: break into new areas/ large customer base -ves: brand image/ requires: economies of scale/ elasticity/ use of spare resources

10 of 16

Practical pricing methods: (4) product line pricing (range) (demand) +ves/ -ves

range of complimentary products/ captive = following from primary (xbox games)/ related-optional (accessories)/ product bundling (package holidays/ buffets) +ves: hide costs -ves: requires first purchase

11 of 16

Practical pricing methods: (5) perceived value (demand) +ves/-ves

identify specific customer for product and put yourself in their place/ +ves: can be specific/ less wastage/ -ves: changes for different customers/ high cost + effort (establish target market for research)

12 of 16

Practical pricing methods: (6) going rate (demand) +ves/-ves

identical goods price at industry average (low order goods) +ves: low cost/ effort /-ves: requires perfectly competitive market (larger no. buyers + sellers/ perfect info/ free entry + exit/ no transaction or transport costs)

13 of 16

Practical pricing methods: (7) price discrimination (demand) +ves/-ves

single product with multiple prices (gym membership/ train ticket)/ +ves: more complete service/ align strategy/ future customers/ -ves: requires: no arbitrage/ different demand curves/ no close substitutes (like monopoly)

14 of 16

Practical pricing methods: (8*) customer profitability analysis (demand)

ABC analysis of profits using customers not products/ Pareto (20:80 law)/ rank which customers should be emphasised/ identify characteristics of high-cost-to-serve + low-cost-to-serve/ modify buying behaviour or charge high price

15 of 16

cost vs demand pricing

COST: easy to establish (cost-plus advantages) DEMAND: depends on research quality/ demand curve accuracy/ price assumed to only affect demand (many other factors)

16 of 16

Get Revising

MA: Pricing

Other cards in this set

Card 2

Front

Back

Card 3

Front

Back

Card 4

Front

Back

Card 5

Front

Back

Comments

Similar Accounting resources: