For example, tennis balls and tennis rackets, razors and blades, printers and printer cartridges. It ignores fixed overheads in the pricing decision, but the sales price must be sufficiently high to ensure that a profit is made after covering fixed costs. Price-discrimination Price-discrimination occurs where a company sells the same products at different prices in different markets.
Each of those model levels has its own price point. This is possible if: Complementary Product A complementary product is one that is used in conjunction with another product. Further purchases can be made at a lower cost per unit. Bids should then be made at prices that exceed incremental costs.
This is done by charging a high price on entry to the market and stimulating demand through advertising and promotion. The major product is priced at a relatively high figure. For short-term decisions many costs are likely to be fixed and irrelevant.
The manufacturers sought to build profit early in the product life cycle - and to recover the development costs over a relatively short period. Advantages of marginal cost-plus pricing It is a simple and easy method to use. When these were introduced, the initial selling price was high. A penetration policy is used to discourage new entrants from entering the market.
Disadvantages of full cost-plus pricing It fails to recognise that since demand may be determining price, there will be a profit maximising combination of price and demand.
Within the product mix or line, there are typically price points that reflect the price level: The mark-up percentage can be varied, and so mark-up pricing can be adjusted to reflect demand conditions. Since fixed costs should be covered in the long-term by sales revenues there are strong arguments for allocating such costs for long-run pricing decisions.
The products within the product line are related but may vary in style, colour and quality. Hence the consumer is locked into subsequent low-value. Customers are prepared to pay high prices in order to gain the perceived status of owning the product early.
This happens in the case of gym memberships. This allows economies of scale to be built rapidly so that unit costs can be reduced. There is no attempt to establish optimum price.
There may be two types of discounts: Volume discounting is applied to products with a limited shelf life, e. This would enable the company to take advantage of the unique nature of the product, thus maximising sales from those customers who like to have the latest technology as early as possible.
Automotive manufacturers have economy models, environmental models, luxury models, work models, and more. As the product enters the later stages of its life cycle, the price will be reduced.
Full cost-plus pricing is a method of determining the sales price by calculating the full cost of the product and adding a percentage mark-up for profit. It draws management attention to contribution, and the effects of higher or lower sales volumes on profit.Lecture Notes on Pricing (Revised: July ) These lecture notes cover a number of topics related to strategic pricing.
If you continue browsing the site, you agree to. Pricing decisions and strategy are the subject of this A Level Business revision quiz. Related Study Notes. Price - Introduction. Study notes. Pricing - factors to consider when setting price. Dynamic Pricing for Restaurants - An Anti-Uber Approach.
21 st December Factors Affecting Pricing Decisions There is considerable uncertainty regarding the reaction to price on the part of buyers, channel members, competitors etc. It is also important in market planning, analysis and sales forecasting. Cost-plus pricing involves establishing the unit cost and adding a mark-up or sales margin.
Full cost-plus pricing is a method of determining the sales price by calculating the full cost of the product and adding a percentage mark-up for profit. Management Accounting | Pricing Decision Analysis The setting of a price for a product is one of the most important decisions and certainly one of the more complex.Download