chapter 12 Flashcards
major influences on pricing decision
- customers
- competitors
- costs
short-run pricing decisions
include (1) pricing for a one-off special order with no long-term implications and (2) adjusting product mix and output volume in a competitive market.
long-run pricing decisions
include pricing a product in a major market where price setting has considerable leeway. many pricing decisions have both short-run and long-run implications.
stable prices
are preferred by customers. it reduces the needs for continuous monitoring of suppliers’ prices, improves planning, and builds long-run buyer-seller relationships.
the market-based approach to pricing
asks ‘given what our customers want and how our competitors will react to what we do, what price should we charge?’ this approach is logical in very competitive markets.
the market-based and cost-based approach both consider customers, competitors, and costs. only the starting points are different.
the cost-based approach to pricing/”cost-plus”
asks ‘what does it cost us to make the product, and hence what price should we charge, that will recoup our costs and produce a desired profit?’ the price is calculated on the basis of costs to produce and sell a product. then, a mark-up is added. often, this price is modified by anticipated customer reaction to alternative price levels and the prices charged by competitors for similar products (market forces).
target price
the estimated price for a product or service that potential customers will be willing to pay.
target operating profit per unit
the operating profit that a company wants to earn on each unit of product or service sold.
target cost per unit
the estimated long-run cost per unit of a product or service that, when sold at the target price, enables the company to achieve the target operating profit per unit. it is derived by subtracting the target operating profit per unit from the target price.
value engineering
a systematic evaluation of all aspects of the value-chain business functions, with the objective of reducing costs while satisfying customer needs. it can result in improvements in product design, changes in materials specifications or modifications in process methods. it seeks to reduce or eliminate non-value-added activites and hence non-value-added costs by reducing the cost drivers of the non-value-added activities.
steps for developing target prices and target costs
- develop a product that satisfies the needs of potential customers
- choose a target price based on customers’ perceived value for the product, the prices charged by competitors, and a target operating profit per unit
- derive a target cost per unit by subtracting target operating profit per unit from the target price
- perform value engineering to achieve target costs
cost incurrence
occurs when a resource is sacrificed or used up.
locked-in (designed-in) costs
those costs that have not yet been incurred but that will be incurred in the future based on decisions that have already been made. distinguishing cost incurrence and locked-in costs is important, because it is difficult to alter or reduce costs that have already been locked in.
two key concept of value engineering and managing value-added and non-value-added costs
- cost incurrence
- locked-in costs
undesired consequences of value engineering and target costing
- adding too many features
- long development times
- organisational conflict
these can be avoided by focusing on the customer, paying attention to schedules, and building a culture of teamwork and cooperation across business functions.
