What are the 3 market based pricing techniques?
- Market skimming
- Market penetration
- Psychological pricing
What does it mean to use price skimming as your pricing method?
It means to set price high in the early stage of the products life to take advantage of the early adopters willing to pay a premium for a new product. As the product goes through its life cycle prices are then lowered.
What does it mean to use a market penetration pricing method?
It means to set a low price in the early statges of a products life in order to break into an already competetive market.
What does it mean to use pschological pricing?
Pyschological pricing attempts to draw attention to the products quality by pricing it at a high price to give the perception of high quality and prestige.
What is the formula for price eleasticity of demand?
PED= % change in quantity demand / % change in price
When a product has a an elastic demand, what is meant?
That a small increase in price will give a large decrease in demand.
What is considered elastic demand?
When the price elasticity of demand is greater than 1
When a product has an inelastic demand, what is meant?
A small change in price causes a proportionally smaller change in demand.
When demand is inelastic, an increase in price will:
A: Increase demand
B: Increase revenue
C: Decrease revenue
B: Increase revenue
What is the economic/optinum pricing model?
It is the model that seeks to establish the price at which revenue will be maximised.
What is marginal revenue?
The extra revenue from selling 1 additional unit.
What is marginal cost?
The extra cost from selling 1 additional unit.
What does the economic pricing model suggest is the profit maximising price?
When MC=MR
What are the methods for establishing optinum price?
- Tabular method (trial & error)
- Differential calculus method
What is the formula for the demand curve/price?
P=A+BX
P=Price
A= Selling price when demand is 0
B=Change in price/change in demand
X= Demand
What is the formula for marginal revenue?
MR = A+2BX
Where:
A= Selling price when demand is 0
B= Change in price/change in demand
X=Demand
What are 3 disadvantages to economic pricing?
- The model assumes that only price affects demand. In reality there are other factors
- It is difficult to assess cost functions
- Firms may not always want to follow profit maximising strategies. For example, they may wish to start with market penetration.
What is differential pricing?
Differential pricing is to charge a different price to different customer for the same service/product. Ie a lower price for students.
What is target pricing?
This is to asses what the customer will be willing to pay and work backwards to meet a target cost/margin.
What are 4 potential advantages of decentralisation?
- Division management are able to respond and make quciker decisions based on local conditions.
- Decision making is more effective due to local knowledge
- Increased responsibility motivates divisional managers.
- Senior management are free to focus on lont term strategic goals
What are 5 potential disadvantages of decentralisation?
- Poor decvision making by inexperianced managers
- Duplication of costs and roles across divisions
- Loss of control by senior management
- Problems with transfer pricing
- Goal incongurance. Ie decisions are not made in the interests of the whole organisation.
What is the residual income method for appraising divisional performance?
Residual income measures divisional profit after deducting minimum required return for capital employed.
What is the formula for Residual income?
Controlable profit - (Capital employed x required rate of return)
What are the objectives of transfer pricing?
- Goal congurance
- To sustain high levels of performance
- Divisional autonomy should be upheld
