💸Cost Accounting Unit 12 – Pricing Strategies & Product Mix

Key Pricing Concepts

• Pricing strategies involve setting prices for products or services to maximize profitability and achieve business objectives
• Price elasticity of demand measures the responsiveness of demand to changes in price (inelastic vs. elastic demand)
• Pricing objectives can include maximizing profits, increasing market share, or promoting customer loyalty
• Cost structures, including fixed and variable costs, play a crucial role in determining prices
• Breakeven analysis helps determine the sales volume required to cover total costs at a given price point
• Profit margins represent the difference between the selling price and the cost of a product or service
• Psychological pricing tactics (odd pricing, charm pricing) can influence consumer perception and purchasing decisions
• Price discrimination involves charging different prices to different customer segments based on their willingness to pay

Cost-Based Pricing Methods

• Cost-plus pricing adds a markup percentage to the cost of a product to determine the selling price
  • Markup percentage is calculated as $(Price - Cost) / Cost * 100$
• Target return pricing sets prices to achieve a desired return on investment (ROI) or return on sales (ROS)
• Absorption costing includes all manufacturing costs (direct materials, direct labor, and overhead) in the product cost
• Variable costing only includes variable manufacturing costs in the product cost, treating fixed costs as period expenses
• Activity-based costing (ABC) assigns overhead costs to products based on the activities consumed during production
• Time-and-materials pricing is common in service industries, charging customers based on labor hours and materials used
• Full-cost pricing considers all costs associated with a product, including non-manufacturing costs (marketing, distribution)
• Marginal-cost pricing sets prices close to the variable cost of production, typically used to stimulate short-term demand

Market-Based Pricing Strategies

• Competitive pricing involves setting prices in relation to competitors' prices (at, above, or below market price)
• Penetration pricing sets low initial prices to attract customers and gain market share, gradually increasing prices over time
• Price skimming sets high initial prices for innovative products, then lowers prices as competitors enter the market
• Loss leader pricing offers certain products at or below cost to attract customers, encouraging sales of higher-margin items
• Bundle pricing combines multiple products or services into a single package at a discounted price
• Promotional pricing offers temporary discounts or incentives to stimulate demand (buy one, get one free; seasonal sales)
• Dynamic pricing adjusts prices in real-time based on market conditions, supply, and demand (airline tickets, ride-sharing services)
• Geographic pricing accounts for differences in costs and demand across different regions or countries

Value-Based Pricing Approaches

• Value-based pricing sets prices based on the perceived value of the product or service to the customer
• Willingness to pay (WTP) represents the maximum price a customer is willing to pay for a product or service
• Value-added pricing emphasizes the unique features, benefits, or experiences that differentiate a product from competitors
• Price-quality signaling uses price as an indicator of product quality, with higher prices suggesting superior value
• Prestige pricing sets high prices to convey exclusivity, luxury, or status (designer clothing, premium cars)
• Functional value pricing focuses on the practical benefits and utility derived from a product (fuel efficiency, durability)
• Emotional value pricing appeals to customers' desires, aspirations, or sense of belonging (brand loyalty, social status)
• Total cost of ownership (TCO) pricing considers the long-term costs associated with a product, including maintenance and disposal

Product Mix Decisions

• Product mix refers to the range of products or services offered by a company
• Product line pricing involves setting prices for a group of related products within a product line
• Price bundling combines multiple products or services into a single package at a discounted price
• Complementary product pricing sets prices for products that are often used together (razor handles and blades)
• Substitute product pricing considers the prices of alternative products that satisfy similar customer needs
• Product life cycle pricing adjusts prices based on the stage of a product's life cycle (introduction, growth, maturity, decline)
• Cannibalization occurs when a new product takes sales away from an existing product within the same company
• Product portfolio analysis evaluates the performance and potential of each product in a company's mix (Boston Matrix)

Pricing in Different Market Structures

• Perfect competition involves many sellers offering identical products, with no individual seller influencing the market price
• Monopolistic competition consists of many sellers offering differentiated products, with some control over pricing
• Oligopoly is characterized by a few large sellers dominating the market, with interdependent pricing decisions
• Monopoly occurs when a single seller controls the entire market, with significant power over pricing
• Price leadership arises when a dominant firm sets prices and other firms follow suit
• Collusion involves competing firms agreeing to fix prices or limit production, which is illegal in most countries
• Price wars occur when firms repeatedly lower prices to gain market share, potentially leading to industry-wide profit erosion
• Government regulations, such as price ceilings and price floors, can impact pricing decisions in certain markets

Ethical Considerations in Pricing

• Price gouging involves charging excessively high prices for essential goods during emergencies or supply shortages
• Predatory pricing sets prices below cost to drive competitors out of the market, potentially violating antitrust laws
• Price fixing agreements between competitors to maintain high prices are illegal and unethical
• Deceptive pricing practices, such as hidden fees or misleading discounts, can erode customer trust
• Price discrimination based on personal characteristics (race, gender) is unethical and often illegal
• Transparency in pricing, including clear communication of prices and any additional charges, promotes consumer trust
• Social responsibility considerations, such as fair trade or environmental sustainability, can influence pricing decisions
• Ethical pricing balances profitability with fair value for customers and respect for competition

Real-World Pricing Case Studies

• Airlines use dynamic pricing and yield management to optimize ticket prices based on demand and booking time
• Ride-sharing services like Uber and Lyft employ surge pricing to balance supply and demand during peak hours
• Netflix's subscription-based pricing model revolutionized the video rental industry and led to the decline of traditional rental stores
• Apple's premium pricing strategy for iPhones and other devices has maintained the brand's perceived value and loyalty
• Amazon's Prime membership program offers free shipping and other benefits for an annual fee, encouraging customer retention
• Walmart's everyday low pricing strategy has made it a dominant force in the retail industry
• Starbucks' premium pricing for coffee and a unique customer experience has built a strong brand identity
• Pharmaceutical companies face scrutiny over high drug prices, with debates around balancing innovation costs and patient access