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Chapter 06 - Pricing decision and Short-term decision - Coggle Diagram
Chapter 06 - Pricing decision and Short-term decision
Pricing policy and the market
Influences on price
Price sensitivity: varies among users
Price perception: way the people react to the price
Quality
Intermediaries
Competitors
Suppliers
Inflation
Newness
Income
Product range
Ethics
Markets
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
Demand
Price Elasticity of Demand = Change in quantity demand (%) / Change in price (%)
PED > 1: demand is elastic, PED < 1: demand is inelastic
Variable influence demands
Price of other goods
Income
Tastes or fashion
Expectations
Obsolescence
Marketing: Price, Product, Place, Promotion
Demand function: P = a - b * Q
P = price
Q = the quantity demanded
a = price at which demands are nil
b = change in price / change in quantity
a = current price + current quantity at current price / Change in quantity when price change $b * $b
Profit are maximized: Marginal cost = Marginal revenue = a - 2
b
Q
Pricing strategy
Cost-plus pricing: add a mark-up profit on full cost
Marginal cost-plus pricing: add a profit margin to the marginal cost of product
Market skimming pricing: charging high prices when first launched, then progressively lower the price.
Application of market skimming:
Product is new and different
Strength and sensitivity of demands are unknown
High initial cash flow
Can identify different market segments
Product may have short life cycle
Market Penetration pricing: Low price when first launched to obtain high demands.
Appropriate in these cases:
Firm wish to discourage new entrants
Firm wish to shorten initial stage of products
Significant economies of scale from high volume of output
Demand is highly elastic
Complementary pricing: goods and products usually buy together
Product line: Group of products relate to each other.
Price discrimination: Charge different price for the same product to different groups of buyers
By market segment
By product version
By place
By time
Conditions to apply price discrimination:
Market must be segmented in price term
No chance of black market
No chance for competitors to cut price
Cost of segmenting not exceed extra revenue
Relevant cost (Short-term decisions)
Relevant cost are future cash flows. Relevant costs are: future costs, cash flow, and incremental costs
Relevant cost of material
If regularly used: relevant cost = current/future purchase costs
If alternative use: relevant costs = higher of other value in use and scrap value
If not in stock: relevant cost = current/future purchase costs
Relevant cost of labor
Spare capacity: relevant cost = 0
Alternative use: relevant cost = Variable cost + contribution lost