PRICING

Chapter 13 - Gowthorpe
Articles on the Reading List

5BA Business Accounting for Non-Specialists

 Introduction to pricing
 Cost plus pricing
 Short run pricing decisions
 Pricing policies
 The role of perception in pricing
Introduction to pricing
 Market based (demand based)
 Pricing based on costs
 Cost plus pricing
 Margin pricing

 Margin / Mark-up distinction

 Mark up – cost 100% makup 30% selling price 130%
 Margin – selling price100% cost 70% margin 30%
Examples of different bases for cost-plus pricing
• Different cost bases and mark-ups can be used to determine
the cost-plus selling price:

Cost base Mark-up (say) Cost-plus

(£) % selling price
(£)
(1) Direct variable costs 200 150 500
(2) Direct non-
variable costs 100
(3) Total direct costs 300 70 510
(4) Indirect (overhead) costs 80
(5) Total cost 380 35 513

Note – overhead could be manufacturing OH only, or total OH

Note the above are alternative approaches

 Scott is considering reducing the price of a
badminton racket. If his cost of sales is £22
calculate a new price based:

 a) cost plus pricing using a mark-up of 30%

 b) margin pricing to give 20%
 The customer would like 15% discount on the
selling price of a pack of 300 badminton
shuttlecocks which is usually priced at £20. If the
customer agrees what is the selling price?
 A tennis racket is selling for £60. If the retailer
makes a margin of 45%, what is the cost price for
the retailer?
Cost plus pricing

• Target mark-ups seek to cover any costs not already included and to give a
profit.

• Target mark-ups can be adjusted to reflect demand, types of products, industry

norms,competitive position,etc.

• Potential criticisms of cost-plus pricing:

1. Ignores demand
2. Does not necessarily ensure that total sales revenue will exceed total cost.
3. Can lead to wrong decisions if budgeted activity is used to unitize costs.
4. Circular reasoning —Volume estimates are required to estimate unit fixed
costs and ultimately price.
Reasons for using cost plus pricing

May encourage price stability

Demand can be taken into account by adjusting the
target mark-ups.
Simplicity (easily delegated)
Difficulty in applying sophisticated procedures where a
firm markets hundreds of products/services.
Used as a guidance to setting the price but other factors
are also taken into account.
Applied to only the relatively minor revenue items.
Morally justifiable
 Short run pricing decisions – typically where there is spare
capacity

Relevant (marginal) cost plus

 Only the incremental cost of undertaking the order should be taken into
account.

Bids should be made at prices that exceed the incremental cost and
meet the following conditions:

 Sufficient capacity must be available to meet the order.

 The bid price should not effect future selling prices and the customer
should not expect repeat business based on short-term incremental cost.

 The order will utilise unused capacity for only a short period and capacity
will be released for use on more profitable opportunities.
 A factory in Dundee is busy for most of the year,
however during the month of July there is very low
demand for badminton rackets. Mrs Murray, a
tennis coach, offers to buy 5000 rackets for £21
each. The usual price is £28 each. Variable costs are
£19. The factory will also incur £2,000 in delivery
costs.
 Should the order be accepted?
Target costing
Target costing is the reverse of cost-plus pricing —The target selling price is the starting
point.

Four stages are involved:

Stage 1: Determine the target price which customers will be prepared to pay for the
product.
Stage 2: Deduct a target profit margin from the target price to determine the target cost.
Stage 3: Estimate the actual cost of the product.
Stage 4: If estimated actual cost exceeds the target cost investigate ways of driving
down the actual cost to the target cost.

Marketing factors and customer research provide the basis for determining selling price
(Not cost).

Emphasises a team approach to achieving the target cost.

Most suited to high sales volume products.

© 2000 Colin Drury

Pricing policies

 
 price skimming

 penetration/predatory pricing

 product line pricing

 price discrimination

 perceived value
Price discrimination example

Economics or exploitation? How Uber applies price discrimi

nation
Dr. Michael McDonald – Fairfield University, USA
 Perception is as important as the price itself...

                                       The Economist: a pricing experiment

Mr. Richard Sedley – Customer Engagement Director, Cscape CEU and Course Director for Social Media at the Chartered Institute of Marketing, UK