Chapter 12: Pricing Decisions and Cost Management Flashcards
What is the main consideration when setting prices for products or services?
Supply and Demand
What are the 3 influences on supply and demand?
- Customers - depend on product features
- Competitors - depend on pricing, product features and production volume
- Costs - depend on production volume
What are the 2 key factors affecting short-run pricing?
- Many costs are irrelevant
- Takes advantage of changes in demand
What are differences between short-run and long-run pricing?
- Irrelevant costs are relevant in the long run, not in the short run
- Profit margins are set to earn a desired rate of return in the long run, margins change in the short run to keep up with demand
In competitive markets, what approach do managers use to price products or services?
Describe that approach.
Market-based approach
Managers look at customer demands and competitors prices, then control costs to earn target rate of return.
In less competitive markets, what approach(es) do managers use to price products or services?
Describe that approach.
Market-based or Cost-Based approaches.
Managers determine costs to produce and then assess the price to charge to recoup costs and achieve a target rate of return.
In noncompetitive markets, what approach do managers use to price products or services?
Describe that approach.
Cost-based approach.
In this type of environment companies don’t have to respond to competitor’s prices, only to the demand customers have for the product.
What are the 5 steps to developing target prices and costs?
- Develop a product people want
- Choose a target price
- Derive a target cost per unit
- Perform cost analysis
- Perform value engineering to achieve target cost
Calculate the target cost per unit.
Target price per unit
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Target operating income per unit
What is value engineering?
Systematically evaluate value chain in order to lower costs, improve quality and satisfaction.
What are value-added cost?
A cost, if eliminated, reduces perceived value or usefulness.
What are non-value-added costs?
A cost that, if eliminated, would not reduce value or usefulness or a cost the customer is not willing to pay for.
How are prices developed using the cost-based approach?
What are some considerations to this point?
Cost base + Markup
It is a starting poing in price-setting and the markup is flexible based on the market.
Why do most firms choose to use the full cost for cost-based pricing?
- Allows for full recovery of all costs
- Allows for price stability because price is harder to manipulate
- It’s simple, there is no need to categorize costs
What is product life cycle?
Why is it significant?
Time from initial R&D to customer service after product is no longer offered.
Managers sometimes have to consider pricing over multiple years.
