Management Accounting-Chapter 15&16

Chapter 15: Pricing — Overview

1. Introduction to Pricing

• Discusses major influences on pricing, market structures, and common pricing methods.

• Overview of chapter content covering:

  • Pricing influences

  • Types of competitive markets

  • Cost-based and demand-based pricing methods

2. Major Influences on Pricing

2.1 Types of Competitive Markets

• Perfect Competition:

  • Many sellers, similar products, easy market entry/exit, market participants earn moderate profits.

  • Example: Apple industry with many identical producers.

• Monopoly:

  • Single seller, no differentiation, high barriers to entry, profit maximization for the seller.

  • Example: Canada Post monopoly on domestic letters.

• Oligopoly:

  • Few sellers, interdependent on pricing, can sell similar or different products.

  • Example: Canadian cellphone carriers.

• Monopolistic Competition:

  • Many sellers, product differentiation, few barriers to entry.

  • Example: Fast food industry.

2.2 Relevant Costs

• Short-Term Decisions: Focus on variable costs; example includes special orders.

• Long-Term Decisions: Incorporate fixed costs and requires a strategy for stability and predictability.

3. Structure of Industry/Market

• Market structure impacts pricing strategy:

  • Number of competitors.

  • Customer influence on prices.

  • Product differentiation.

  • Market entry barriers.

4. Product Life Cycle

• Stages of Product Life Cycle:

  • Development: Costs incurred without revenue.

  • Introduction: Slow sales rise.

  • Growth: Rapid increase in sales.

  • Maturity: Sales plateau.

  • Decline: Sales loss; management strategies to extend maturity stage.

5. Cost-Based Pricing

• Emphasis on costs in setting prices.

• Common Strategies Include:

  • Life-cycle Costs: Prices set to recover costs over the product's life.

  • Target-Based Pricing: Set a target selling price and work backward to target costs.

  • Variable Product Costs: Set prices based on variable costs plus a markup.

  • Full Absorption Costs: Covers all costs, suitable for financial reporting.

6. Demand-Based Pricing

• Focuses on perceived value and demand influences:

  • Strategies:

    • Predatory Pricing: Set prices below costs to drive out competitors (illegal).

    • Penetration Pricing: Low initial price to gain market share.

    • Price Skimming: Set high prices initially for early adopters; lower over time.

    • Price Bundling: Combined pricing for multiple products to create value.

    • Peak-Load Pricing: Higher prices during peak demand periods.

    • Loss-Leader Pricing: Sell at a loss to stimulate sales of other products.

7. Other Pricing Strategies

• Value-Based Pricing: Setting prices based on perceived value and competitive landscape.

• Reverse Engineering: Analyze competitors' costs to inform pricing decisions.

• Considerations for Non-Profits and Public Sector: Pricing to cover costs versus profit generation.

Chapter Summary

• Discusses key pricing strategies relevant to management accounting, influences on pricing, and systematic approaches for pricing decisions.

Practice Problem Examples

• Example scenarios analyzed for product life cycles, market structure, and pricing strategies.

  • Svelte Co. example in clothing manufacturing focused on competitive pricing strategies based on market influences.