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Pricing Methods, image, image - Coggle Diagram
Pricing Methods
Elasticity of demand
Profits
Volume
Price
Cost
Pricing decisions depend on the quantity sold
Price reductions will increase demand and vice versa
Elasticity of Demand = Change in Price / Change in Demand Quantity
Limitations
Hard to accurately determine the function
Hard to obtain accurate marginal cost
Ignore other facotrs that affect demand
Aim for target not optimum profit
A profit-maximisation model
Optimal price for attracting the greatest number of customer
Economical View
Relationship might not be linear
Require consideration on the competitor's reaction (price change)
Customer would not react immediately with the change in price
Different products have different elasticity
Accounting View
Focus on the pricing
Assume the linear relationship between price and demand which might be easier to analyse the data
Pricing based on full cost
Advantages
Price reflects the true cost of product
Useful in contracting industries
Help to control cost
Disadvantages
May lead to uncommercial prices
Ignore factors such as competitor activity
Ignore elasticity of demand
Problems arised when sales volume not achieved
Pricing based on marginal cost
Advantages
Comparable with relevant costs
Accurate
Facilitate decision making for scare resources
Disadvantages
Not popular
Fixed cost cannot be recovered in long-term
Hard to raise prices when low mark-up
