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Pricing Decisions (Influences on Price Setting (Cost of production, Demand…
Pricing Decisions
Influences on Price Setting
Cost of production
Demand
Competition
Business strategy
Trading regulations
Product life cycle
Target demographic
Pricing Policies
Price skimming
Penetration pricing
Discrimination pricing
Price bundling
Price unbundling
Discounting
Versioning
Pricing Methods
Cost-plus
Product cost+Desired Margin/Mark-up
Useful when it is difficult to estimate demand
Advantages
Quick and easy
Encourages price stability
Disadvantages
Ignores demand and competitor prices
Doesn't maximise revenue
Level of mark-up is arbitrary
Target Costing/Pricing
Target cost = what customers are willing to pay - desired margin
Might have to streamline cost structure to meet target cost
Uses market conditions as a basis for selling price
Market-based Pricing
Cost of product is irrelevant to selling price as this is influenced by demand only
For homogenous, large-volume products
Economist's vs Accountant's Approach
Economist's Approach
Profits maximised when MR=MC
Reducing costs can produce greater profits
Demand changes with price
Accontant's Approach
Use CVP analysis to find break-even point
Price determined by cost