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Pricing Decisions, Glossary - Coggle Diagram
Pricing Decisions
Overview on Pricing Decisions
Three types
Life-cycle pricing
Target Pricing
Cost-plus pricing
Influences
Customers
- Through their effect on demand
Competitors
- Must be aware of the actions of competitors (i.e. learn from them)
Costs
- Affects supply (the lower the cost, the more the quantity)
Dependants
2) Cost to make and distribute the product
3) Affects supply (lower the cost, higher the quantity)
1) Customers place a value on the product
Target Costing and Pricing
Estimated price customers are willing to pay
1) Customer Value
2) Competitor strategy
Identifies customer needs and perceptions of the product value
Five steps
3) Select a target O/I per unit (price - O/I)
4) Cost analysis to determine needed costs
2) Select a target price
1) Determine which product meets customer needs
5) Engineer costs to achieve target costs
Cost Plus Pricing
Use pricing formulas based on cost
Relevant info related to costs
A markup is added to a cost base
Regulated industries
There are regular rate increases
For example, utilities companies and telecommunications
Historical cost + a markup
Alternative Pricing Methods
Life-cycle costing
Estimates FULL product costs until it is retired
Cost examples
- Asset retirement, Environmental costs
From product development to product discontinuation
S/R and L/R Pricing Decisions
Long-run (typically greater than a year)
Build long-term relationships with customers by maintaining a
stable price
Prices
Based on full product cost (Includes IDC) -
Cost based
Set by markets that are competitive (i.e. Gasoline) -
Market based
Company strategy aligns with profitability strategy
Short-Run (typically less than a year)
Qualitative - Business Strategy (Undercutting competitors)
For example, Special orders, adjusting a product
Quantitative - Relevant costs (VC, FC within a year)
Glossary
S/R - Short run
L/R - Long run
O/I - Operating Income
VC - Variable Costs
FC - Fixed Costs