Chapter 7: pricing Flashcards

Question

What are marginal or full costs

Answer 1

MC= simpler (don't need absorption or fixed OH), more consistent using contribution in decision making. Difficult to set appropriate margins/ mark-ups to ensure FC are covered Useful for ST decisions with excess capacity or 1 off contracts Full cost= all costs incorporated into pricing decision to ensure a profit is made if target volume is achieved Criticism= to determine FC per unit it depends on volume, price and cost per unit. Method of absorbing OH is arbitrary. Prices may not be realistic compared to what customers want to pay

Answer 2

Min tender price for a 1 off tender or contract Min price= total of all relevant cash flows Only suitable for 1 off decisions because: FC may become relevant in the LT Problems estimating the incremental cash flow Conflict between accounting measures e.g profit & this approach

Answer 3

1) Widely used & accepted 2) Simple to calculate if costs are known 3) Selling price decision may be delegated to junior management 4) justification for price increases 5) may encourage price stability- if all competitor have similar cost structures and use similar mark-up

Answer 4

1) Ignores the economic relationship between price& demand 2) No attempt to establish optimum price 3) Different absorption methods give rise to difficult costs and selling prices 4) Doesn't guarantee profit- if sales volumes are low- FC may not be recovered 5) Decide between full cost, marginal or manufacturing cost 6) structured method doesn't recognise the manager's need for flexibility in pricing 7) circular reasoning- price increase can reduce volume, increase cost per unit, and pressure to increase price further

Answer 5

Customers perception of the benefits of the products price reflect the benefits Small regard to cost. The greater the benefit of understanding the customer the better placed to price the products

Answer 6

set a price based on competing products Competing products: 1) same type of product not easily distinguishable e.g petrol so price changes of competitors have a serious impact 2) Sub products which are different but fulfill the same need e.g ice cream instead of cold drink on hot day impact of price changes depend on relative price/ performance of substitute

Answer 7

1) cost plus pricing 2) Market skimming 3) Penetration pricing 4) Complementary product pricing 5) Productline pricing 6) volume discounting 7) price discrimination 8) relevant cost pricing

Answer 8

charging a higher price when product is first launched to max ST profitability =. Take advantage of the novelty appeal of new products when demand is initially inelastic When the market becomes saturated the price is reduced to attract the part of market which is untouched

Answer 9

1) product is new & different w/ little competition (most common) 2) products have a short life cycle. Recover R&D quickly and make profit 3) strength and sensitivity of demand to price is unknown. Better to start high and go lower if demand isn't there 4) Firm has liquidity problems- generate high cash flows early on

Answer 10

If products are selling at a high price= high demand to join this market To contain this demand there must be 1+ significant barriers e.g patent protection, strong brand loyalty

Answer 11

charging low prices at product launch to gain market share & rapid acceptance of product When market share is achieved - prices are increased Opposite of market skimming

Answer 12

1) firms wishes to increase market share 2 ) firm wants to discourage new entrants from entering the market 3) If there's sig economies of scale to be achieved from high volume output- quick penetration is desirable 4) if demand is highly elastic and respond well to low prices

Answer 13

normally used with another product e.g razors & razor blades, games consoles & games etc Complementary goods give the supplier additional power over the consumer

Answer 14

1) major product priced low = encourages the purchases and locks them into subsequent purchases at a high price e.g printers/cameras 2) major product priced high = barrier to entry/ exit and consumer locked into subsequent purchases at low price e.g high end sports centres & cheap green fees

Answer 15

product line= range of products related to eachother/ price differences between upgrades of a product or service Set the price steps between various products in a product line based on: Cost differences between products Customer evaluations of different features competitors prices

Answer 16

offering customers a lower price per unit if they purchase a particular quantity of a product 1) Quantity discounts- for customers that order larger quantities 2) Cumulative quantity discounts - discount increases as cumulative total ordered increases. Ideal for people who don't want to place large individual orders but purchase large quantities

Answer 17

1) increased customer loyalty- they're locked in so further purchases can be made a lower price per unit 2) attracts new customers- exceptional discount on 1 off basis. Supplier can get their feet in the door 3) Lower sales processing costs- increased proportion of sales is bulk of orders 4) lower purchasing costs - discounts from suppliers 5) discounts help sell items bought primarily on price 6) clearance of surplus stock/ unpopular item through use of discounts 7) discounts geared to particular off peak periods

Answer 18

1) substantial sales margin so profits still made after discounting 2) product bought on price so difficult to distinguish it from competing products 3) products with limited shelf life can be discounted to shift them (e.g clothes)

Answer 19

Company sells the same product/ service at different prices in different markets for reasons not associated with costs

Answer 20

1) seller has some monopoly power or price will be driven down 2) customers can be segregated into different market 3) customers can't buy at lower price in 1 market and sell at higher in another 4) price discrimination strategies are effective for services 5) must be different price elasticities of demand in each market so prices can be raised in 1 and lowered in another

Answer 21

1) black market can develop so those in a lower priced segment can resell in a higher priced segment 2) competitors join the market and undercut the firm's prices 3) customers in the higher priced brackets look for alternatives and demand becomes more elastic over time