Strategic pricing decision require information from the:
- Sales Lifecycle: Sequence of phases in the life of a product or service (from the viewpoint of sales volume achieved)
- Cost Lifecycle: Sequence of phases in the life of a product or service (from the viewpoint of costs incurred)
What can be said about sales-cost cycle relationship?
Strategic pricing depends on the position of the product or service in the sales life cycle, which implicates a particular cost approach.
- Phase 1: Introduce. Pricing is set relatively high to recover R&D costs and take advantage of new-product demand
- Phase 2: Growth. Pricing is likely to stay relatively high as the firm refines product design and attempts to build profitability
- Phase 3: Maturity. The firm becomes more of a price taken than a price setter and attempts to reduce costs
- Phase 4: Decline. Volumes and prices decline and the firm increases emphasis on cost controlling
What are some other factors influencing strategic pricing decisions?
- Customers influence prices through their effect on demand
- Companies must examine pricing decisions through the eyes of their customers
- Too high a price may cause customers to reject a company’s product
- Competitors influence prices through their actions
- Alternative or substitute products of a competitor may affect demand and for a company to lower its prices
- Costs influence prices because they affect supply
- Companies produce and sell units as long as revenue from an additional unit exceeds the cost of producing it
- The lower the cost relative to the price, the greater the quantity of the product the company is willing to supply
What are 11 different pricing strategies?
- Psychological pricing: Attractive price points ($3.99 not $4.00), BOGO
- Peak load pricing (Uber)
- Skimming: high prices of new models (electronics)
- Loss leaders/freemium (game consoles, make money on the corresponding games)
- Pay what you want (Radiohead, restaurants)
- Penetration pricing: low pricing/build market share (new products)
- Predatory pricing: aggressively low prices, squeezing out competitors (Walmart, Amazon)
- Price gauging: charging for scarce goods (fuel during hurricanes)
- Price discrimination: according to area/class (Cineplex)
- Price leadership: dominant competitors set price and others follow
- Value pricing: worth to the customer (art, housing, restaurants)
What is the idea of target cost approach?
Company determines the allowable (“target”) cost for a product or service, given a competitive (“target”) price, so the firm can earn a desired profit.
What is the equation for target cost?
target cost = competitive price - desired profit
How do you implement target costing (steps)?
- Determine the target price of the product
- Determine the desired target profit (or “margin”)
- Profit per unit, profit as a % of revenue, profit as a % of cost
- Calculate the target cost = target price less target profit
- Consider what needs to be done to try to achieve that target cost
- Reduce material cost, recognize gains in production efficiency, integrate new manufacturing technology
- Kaizen, TQM, lean manufacturing and continuous improvement models
- Product redesign, reverse engineering or “tear-down” analysis (analyze and benchmark against competitors)
- Value engineering, follows on from Activity based management in focusing on analysis of value/non-value added activities
- Establish cross-functional teams to attain target costing
What is value engineering?
The systematic evaluation of all aspects of the value chain business functions, with the objective of reducing costs while satisfying customer needs.
- Analyze tradeoffs between product functionality (features) and total product cost of each major function/feature of product
- Functional analysis and benchmarking to determine which features (to keep or delete) give the company a competitive advantage
- Consumer preference analysis during product (re)design stage to identify critical features
- Focus on defining the value adding and the non-value adding activities, functionalities and their related costs
- Keep costs but enhance the value to the customer
- Avoid non-value adding functionalities/costs - Provide desired level of performance (what the consumer values and therefore is prepared to pay for) without exceeding target cost
What are dimensions in the value engineering?
Horizontal: High cost - Low cost
Vertical: High value - Low value
What are the benefits of strategic pricing/target costing?
- Increased customer satisfaction (design is focused on customer value)
- Reduced costs (more effective and efficient design)
- Helps the firm achieve desired profitability on new and redesigned products
- Decreased total time required for product development through improved coordination of design, manufacturing, and marketing
- Increased communication and cooperation among cross-functional teams/departments
- Improved overall product quality
What is a business plan?
A business plan (BP) is a written description of a business’s future; a document that discloses what you plan to do and how you plan to do it.
- A domain where strategy and management accounting coincide
What are some characteristics of business plans?
- BPs are inherently strategic, summarizing by which resources a clearly defined course of action will be carried out
- BPs also serve the external coordination (with financiers and advisers) and internal coordination (among the team) of activities
- BPs may further serve as simulation (of possible strategies), motivation (setting goals for the team), and monitoring (dashboard)
- BPs should contain a variety of different information, both qualitative and quantitative, as well as financial and non-financial
What are common parts to have in a business plan?
- Break-even analysis
- Cost-volume-profit analysis and target income sales
- Contribution margin analysis
- Cash-flow forecasting, budgeting statements and discounted cash flow analysis
What does scenario/sensitivity analysis do?
- Testing the robustness of the results of a model or system in the presence of uncertainty by reviewing critical variables
- Better understanding of the relationships between input and output
- Uncertainty reduction by identifying model inputs that cause significant uncertainty in the output
- Uncovering errors in the models and concepts
- Model simplification by excluding variables that do not impact the output variables
- Enhancing communication of decision makers and other employees throughout the organization
What are some parts to consider when evaluating a business plan?
- What are the annual fixed costs?
- What are the start-up costs?
- What are the variable costs per unit sale?
- What is the break-even (Y1 & Y2)?
- How sensitive is the solution?
What are some theories to leverage to qualitatively assess a business plan?
- Macroeconomic analysis
- Porter’s Five Forces
What are managerial issues to consider in business plan evaluation?
- Profitability
- Market and competition
- Economy (macro)
- Control (ownership)
