Managerial Accounting: Pricing Strategies and Approaches, Appunti di Sales management

Scarica Managerial Accounting: Pricing Strategies and Approaches e più Appunti in PDF di Sales management solo su Docsity! Managerial Accounting Helena NAFFA, PhD Department of Finance 29th September, 2016 Pricing Pricing Perfect and imperfect competition Demand-based approaches Cost-based approaches Marketing-based approaches Illustration – Monopolistic competition Consider the soap market: there are many different brands of soap and they are similar. However in some way each soap product tries to differentiate itself from competition like: one might claim to leave you with soft skin, while the other that it has clean, fresh scent. Each participant has some control over the market price as long as consumers are willing to buy the product at the new price. Other examples of monopolistic products are: shampoo products, toothpaste, oil changes. Demand-based approaches The relationship between selling price and demand – this is often an inverse, linear type of relation. Price Quantity demanded In theory it is possible to establish an optimum price, which will maximise profits. Illustration – Tabular approach XYZ Ltd. is introducing a new product. Machinery is hired to manufacture the product at a cost of $200,000 per annum, the maximum capacity is 60,000 units per annum. Additional machines can be hired at $80,000 per annum and each additional machine increases capacity by 20,000 units per annum. Production is limited to a maximum of 90,000 units because of shortage of space. Variable cost is estimated to be $6 per unit. Estimation of Price-Demand are as follows: Units sold 50,000 60,000 70,000 80,000 90,000 90,000 Selling price $22 $20 $19 $18 $17 $15 What is the optimum price and quantity? Optimum price MC The optimum price is $50, when Q=3. At output less than Q=3 MR>MC and at output greater than Q=3 MC>MR. Establishing the optimum price Step (1): Establish the linear relationship between price (P) and quantity demanded (Q): P = a + bQ , where „a” – is the intercept and „b” is the gradient of the line Price (P) Quantity (Q) a 0 P= a+bQ Gradient of line ΔP/ΔQ=b Step (2): Find the Marginal revenue: MR= a – 2bQ Step (3): Establish the Marginal cost (MC). This will be the variable cost/unit. Step (4): Maximise profit by equating MC and MR, then solve to find Q. Step (5): Substitute Q into the price equation to find optimum P. Step (6): Calculate the maximum profit. Cost-based pricing „Cost-plus” pricing is a favoured traditional approach, where the selling price is established by: • Calculating the unit cost • Adding a mark-up or a margin to provide profit (1)Unit cost may reflect: ! Full costs ! Production costs ! Variable costs (2)Profit may reflect: !Risk of the product !Competitors mark-ups !Desired profit or ROCE (Return on capital employed) !Type of cost used Profit mark-up: is the profit as a percentage of the cost Profit-margin: is the profit as a percentage of selling price Customer-based pricing This pricing reflects customers’ perceptions of benefits. Examples are: convenience, status. The product is priced to reflect these benefits. The approach relates to costs, however it reflects the belief that the greater understanding you have of customers the better placed you are to price the product. Illustration: the offer of food and drink on a remote beach in a hot country will be perceived by tourists as a significant benefit. So they are more likely to pay an amount in excess of cost. Market-skimming pricing Market-skimming means to charge high prices when a product is first launched in order to maximise short-term profitability. Conditions when market-skimming is a suitable strategy: (1)The product is new and different, there is little competition. (2)Products that have a short life-cycle and there is a need to recover costs quickly. (3)Where the strength and sensitivity of demand to price is unknown. (4)A firm with liquidity problems can use market-skimming to generate high cash-flows early on. For sustainable skimming one or more significant barriers to entry must be present to deter potential competitors. Examples are: patent protection, brand loyalty. Penetration pricing Penetration pricing means to charge low prices when a new product is launched in order to gain rapid acceptance of the product. Prices can be increased when market share is achieved. Conditions when penetration pricing is suitable strategy: (1)When the goal is to increase market share (2)Discourage new entrants from entering the market (3)Significant economies of scale can be achieved and so a quick penetration into the market is desirable. (4)Demand is highly elastic. Illustration: the launch of Microsoft’s anti-virus product, Windows Live Onecare was an example of penetration pricing. Competitors lost material market share in a short-period of time. Complementary product pricing Complementary product is normally used with another product, like razor and razor blades, game consoles and games, printers and printer cartridges. Complementary goods provide suppliers additional power. Illustration: Two forms of complementary pricing (1)The major product – say a printer – is priced at a low level to encourage purchase and lock the consumer into subsequent purchases of high price consumables – printer cartridge. (2)The major product – say membership in a golf club – is priced at a high level to create a barrier to entry and exit. So the consumer is locked into subsequent purchases of low price facilities – green fees. Benefits of using volume-discounting •Increased costumer loyalty – cumulative quantity discounts •Attracting new costumers •Lower sales processing costs – proportionally higher number of bulk orders •Lower purchasing costs – higher sales volume may result in discounts from suppliers •Helps to sell items that are bought on price. •Clearence of surplus stock or unpopular item. •Discounts can be geared to particular off-peak periods. Price-discrimination pricing Price discrimination means to sell the same product at different prices in different markets by a company. Conditions when price-discrimination is suitable strategy: oThe seller has some degree of monopoly power (or the price will be driven down). oCostumers can be segregated into different markets. oCostumers cannot buy at a lower price and sell at a higher price to a different market. oDifferent price elasticities of demand in each market. Dangers: •Black market may develop: a lower priced segment may resell to a higher price segment. •Competitors undercut the prices •Costumers in a higher priced segment may look for alternatives. Relevant cost pricing Relevant costs can be used to arrive at a minimum tender price for a one-off tender or contract. Relevant cost pricing is only0 suitable for a one-off decision since: •Fixed costs may become relevant in the long-run •Difficulties to estimate incremental cash-flows •Conflict between accounting measures like profit and the approach.