Chapter 14: Pricing Decisions and Cost Management

influences of demand and supply

customers, competitors, costs

customers

influence price through their effect on the demand for a product or service, based on factors such as product features and quality

competitors

influence price through their technologies, plant capacities, and operating strategies that affect their costs

costs

influence prices because they affect supply. The lower the cost of producing a product, the greater the quantity a firm is willing to supply

short run pricing

have a time horizon of less than one year and include: pricing a one time only special order with no longer run implications and adjusting product mis and output volume in a competitive market

long run pricing

builds long run relationship with customers based on stable and predictable prices. managers prefer a stable price becayse it reduces the need for continuous monitoring of prices, improves planning, and builds long run buyer seller relationships

long run pricing approaches

market based

cost based

market based approach

give what our customers want and how competitors will react to what we do, what price should we charge?

cost based approach (cost plus)

given what it costs us to make this product, what price should we charge that will recoup our costs and achieve a target return on investment

managers need to understand customers and competitor

1. lower cost competitors

2. product have shorter lives

3. customer are more knowledgeable

target price

the estimated price for a product or service that potential customers are willing to pay

target product estimated base

an understanding of customer perceived value for a product or service

how competitors will price competing products or services

develop a product

choose target price

derive a target cost per unit

perform value engineering

4 steps in developing target price/ cost

value engineering

is a systematic evaluation of all aspects of the value chain with the object of reducing costs and achieving a quality level that satisfies customers

managers must distinguish

value added activities and costs from non value added activities and costs

value added cost

is a cost that if eliminated would reduce the actual perceived value or utility (usefulness) customers experience from using the product or service

non value added costs

are costs that if eliminated would NOT reduce the actual or perceived value or utility (usefulness) customers gain from using the product or service

it is a cost the customer is unwilling to pay for

cost incurrence

describes when a resource is consumed (or benefit foregone) to meet a specific objective

locked in costs (designed in costs)

costs that have not yet been incurred but will be incurred in the future based on decisions that have already been made

employee frustration

cross functional teams may add too much

too long product development

may start conflict

undesirable effects of unmanaged value engineering

encourage employee participation

customer focus

attention to schedule

set cost cutting targets

how to avoid undesirable effects of value engineering

alternative cost bases for cost based approach

variable manufacturing cost, variable cost, manufacturing cost, full cost

full cost recovery

price stability

simple approach

reason for cost based

selling prices computed under cost base

pricing are prospective prices

target pricing approach

reduces the need to go back and forth among prospective cost base prices, customer reactions, and design modifications

budgeted life cycle costs

provide useful information for strategically evaluating pricing decisions

two important life cycle budgeting cost features

the development period for research and development and design is long and costly

many costs are locked in at the research and development and design stages, even if research and development and design costs are themselves small

managing environmental costs

is a critical area where managers apply life cycle costing and value engineering

environmental costs

are incurred over several year of the products life cycle are often locked in at the product and process design stage

sustainability accounting standards board (sasb)

a new organization that has begun defining standards for environmental, social, and governance (esg) performance for different industries

customer life cycle costs

focus on the total costs incurred by a customer to acquires, use, maintain, and dispose of a product or service

influence the prices a company can charge for its products

predatory pricing

when a company deliberately prices below its costs in an effort to drive competitors out of the market to restrict supply and then recoups its losses by raising prices or enlarging demand

collusive pricing

when companies in an industry conspire in their pricing and product decisions to achieve a price above the competitive price and so restrain trade

non cost factors in pricing decisions

price discrimination

peak load pricing

international pricing

price discrimination

is the practice of charging difference customers different prices for the same product or service

is permissible if differences in prices can be justified by cost differences

illegal price discrimination

if the intent is to lessen or prevent competition

peak load pricing

is the practice of charging a higher price for the same product or service when demand approaches the physical limit of the capacity to produce that product or service

international pricing

is a form of price discrimination where prices charged in different countries may vary much more than the costs delivering the product because of difference in customers purchasing power in those different countries