Pricing Decisions and Cost Management

Prof. Sarbesh Mishra Finance Area.
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Sarbesh Mishra
B.Com.(Hons) Post-graduate Commerce. M.Phil (Commerce) Ph.D. (Commerce) submitted. : Joined in University of Delhi as Lecturer in Commerce in 2001 and continued till 2005 and then joined Army Institute as Senior Faculty, Finance Area prior to current appointment at NICMAR..
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Popular Beliefs
“ It is unwise to pay too much, but it’s worse to pay too little. When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing you bought it to do.
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“ The common law of business balance prohibits paying a little and getting a lot – it can’t be done.”
John Ruskin (1819-1900) British Poet, Scientist and Philosopher

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“Price has no meaning except in terms of the quality of the product.”
Dr. W. Edwards Deming (1900-1993)

A Quality Outcome is significantly more likely when a project is executed using Quality-Based Principles.

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Pricing decisions are management decisions about what to charge for the products and services that companies deliver. s To maximize operating income, companies produce and sell units as long as the revenue from an additional unit exceeds the cost of producing it.
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Learning Objectives
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Discuss the three major influences on pricing decisions Distinguish between short-run and long-run pricing decisions Price products using the target-costing approach Apply the concepts of cost incurrence and locked-in costs
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Contd…. Discuss the three major influences on pricing decisions

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Major Influences on Pricing Decisions
Customers 2 Competitors 3 Costs s The price of a product or service is the outcome of the interaction between the demand for the product or service and its supply.
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Major Influences on Pricing Decisions
Customers influence prices through their effect on demand. s Companies must always examine pricing decisions through the eyes of their customers. s Too high a price may cause customers to reject a company’s product.

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Major Influences on Pricing Decisions
Competitors influence prices through their actions. s Alternative or substitute products of a competitor may affect demand and force a business to lower its prices. s Fluctuations in the exchange rates of different countries’ currencies also affect pricing decisions.
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Major Influences on Pricing Decisions
Costs influence prices because they affect supply. s The lower the cost relative to the price, the greater the quantity of product the company is willing to supply.

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Contd…. Distinguish between short-run and long-run pricing decisions

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Time Horizon of Pricing Decisions
Most pricing decisions are either short run or long run. s Short-run decisions typically have a time horizon of less than a year. – Pricing a one-time-only special order – Adjusting product mix and output volume

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Time Horizon of Pricing Decisions
s –

Long-run decisions involve a time horizon of a year or longer. Pricing a product in a major market where price setting has considerable leeway (Amount of freedom in the way you want to )

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Value Engineering

Value engineering is a systematic evaluation of all aspects of the value-chain business function, with the objective of reducing costs while satisfying customers needs.

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Price Discrimination Laws
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Predatory pricing occur when: the predator company charges a price that is below an appropriate measure of its costs, and the predator company has a reasonable prospect of recovering in the future the money it lost by pricing below cost.

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Price Discrimination

Collusive pricing occurs when companies in an industry conspire in their pricing and output decisions to achieve a price above the competitive price.

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Thank You

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