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Lecture Management accounting: An Australian perspective: Chapter 19 - Kim Langfield-Smith

This chapter contains a more up-to-date and comprehensive coverage of the factors that influence product and service pricing, and various alternative pricing strategies, such as value-based pricing and economic-value pricing, are presented. An updated section on legal restrictions on pricing is included in this chapter. | Chapter 19 Pricing and product mix decisions Major influences on pricing decisions Market positioning Product cost Customer value Competitor behaviour Legal, political and ethical issues Cost forms the lower limit of the price, and customer value the upper limit Major influences on pricing decision Market positioning Companies position themselves in certain markets and this may influence product prices A firm with a reputation for very high quality and prestigious products may set a high price, consistent with that image An overemphasis on price cutting can damage a product’s image, and reduce profitability continued Major influences on pricing decisions Product costs In the long-term firms must produce at a cost below selling price The importance of product cost in price setting varies across industry Even when a firm sets a price below cost, it is still important to have an awareness of product cost continued Major influences on pricing decisions Customer value . | Chapter 19 Pricing and product mix decisions Major influences on pricing decisions Market positioning Product cost Customer value Competitor behaviour Legal, political and ethical issues Cost forms the lower limit of the price, and customer value the upper limit Major influences on pricing decision Market positioning Companies position themselves in certain markets and this may influence product prices A firm with a reputation for very high quality and prestigious products may set a high price, consistent with that image An overemphasis on price cutting can damage a product’s image, and reduce profitability continued Major influences on pricing decisions Product costs In the long-term firms must produce at a cost below selling price The importance of product cost in price setting varies across industry Even when a firm sets a price below cost, it is still important to have an awareness of product cost continued Major influences on pricing decisions Customer value Understanding customer value is a critical aspect in price setting The difference between the value that a customer gains by owning and using a product, and the price paid for the product Businesses must understand the specific aspects of a product or service that provide value to the customer continued Major influences on pricing decisions Competitors' behaviour Competitors’ behaviour can effect a company’s pricing decisions When considering the reaction of competitors management must take care to define its product and market correctly Predicting competitors’ reactions to its products and pricing strategy is a difficult but important task for management continued Major influences on pricing decisions Legal, political and ethical issues Managers must adhere to the laws when setting prices The law generally prohibits companies from discriminating between customers in setting prices Political pressures may lead to intervention in the setting of prices Ethical considerations may need