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.
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Lecture Management accounting: An Australian perspective: Chapter 19 - Kim Langfield-Smith Chapter 19 Pricing and product mix decisionsCopyright 2003 McGraw-Hill Australia Pty Ltd, PPTs t/a Management Accounting: An Australian Perspective 3/e by Langfield-Smith, Thorne & Hilton Slides prepared by Kim Langfield-SmithMajor influences on pricingdecisions Marketpositioning Productcost Customervalue Competitorbehaviour Legal,politicalandethicalissues Costformsthelowerlimitoftheprice,and customervaluetheupperlimitCopyrightª2003McGrawHillAustraliaPtyLtd, 2Copyrightª2003McGrawHillAustraliaPtyLtd, 3Major influences on pricingdecision Marketpositioning Companiespositionthemselvesincertain marketsandthismayinfluenceproductprices Afirmwithareputationforveryhighqualityand prestigiousproductsmaysetahighprice, consistentwiththatimage Anoveremphasisonpricecuttingcandamagea product’simage,andreduceprofitability continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 4Major influences on pricingdecisions Productcosts Inthelongtermfirmsmustproduceatacost belowsellingprice Theimportanceofproductcostinpricesetting variesacrossindustry Evenwhenafirmsetsapricebelowcost,itis stillimportanttohaveanawarenessofproduct cost continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 5Major influences on pricingdecisions Customervalue Understandingcustomervalueisacritical aspectinpricesetting Thedifferencebetweenthevaluethata customergainsbyowningandusingaproduct, andthepricepaidfortheproduct Businessesmustunderstandthespecific aspectsofaproductorservicethatprovide valuetothecustomer continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 6Major influences on pricingdecisions Competitorsbehaviour Competitors’behaviourcaneffectacompany’s pricingdecisions Whenconsideringthereactionofcompetitors managementmusttakecaretodefineits productandmarketcorrectly Predictingcompetitors’reactionstoitsproducts andpricingstrategyisadifficultbutimportant taskformanagement continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 7Major influences on pricingdecisions Legal,politicalandethicalissues Managersmustadheretothelawswhensetting prices Thelawgenerallyprohibitscompaniesfrom discriminatingbetweencustomersinsetting prices Politicalpressuresmayleadtointerventionin thesettingofprices Ethicalconsiderationsmayneedtobe considered,includingdeceptivepracticesCopyrightª2003McGrawHillAustraliaPtyLtd, 8Economic profit-maximising models Economicmodelfocusontheoptimalprice andsalesquantitythatwillmaximiseprofit Priceelasticityistheimpactonprice changesonsalesvolume Crosselasticityistheextenttowhicha changeinaproduct’spricecanaffectthe demandforasubstituteproduct continuedCopyrightª2003McGrawHillAustraliaPtyLtd, 9Economic profit-maximising models Demandiselasticifapriceincreasehasa largenegativeimpactonsalesvolume Demandisinelasticifapricechangehas littleornoimpactonsalesquantityCopyrightª2003McGrawHillAustraliaPtyLtd, 10Limitations of theeconomic model Difficulttopreciselydeterminethefirm’s demandcurveandmarginalrevenuecurve Manyfactorsaffectproductdemand Notvalidforallformsofmarkets Difficultyofmeasuringmarginalcost—most costingsystemsarenotdesignedtodothisCopyrightª2003McGrawHillAustraliaPtyLtd, 11Pricing strategies Valuebasedpricing Wherecustomers’perceptionsofthevalueof theproductorserviceguidethepricing Economicvaluepricing Specificallyestimatesthecostsandbenefits experiencedbythecustomer,whichextend beyondtheinitialpurchaseprice OftenusedinindustrialmarketsCopyrightª2003McGrawHillAustraliaPtyLtd, 12Using product costs inpricing Productcostsareused,tosomedegree,to setprices Difficulttodothoroughmarketanalysisforall products—needquick,straightforwardmethods tosetprice Costs ...