TOPIC 5: PRICING DECISION

REFER TEXTBOOK: CHAPTER 16 AND

CHAPTER 20
LECTURE COVERAGES: TOPIC OUTCOMES:
•Pricing Methods: •Able to explain
 Traditional method different pricing
(full costs, methods
marginal costs,
minimum costs) • Able to explain
 Target costing concept of target
•Pricing Strategies costing
 5 common • Able to explain
strategies pricing strategies to
 Factors influencing achieve competitive
pricing Decision advantage
 PRICING DECISION
LECTURE COVERAGES:
•Pricing Methods:
 Traditional method (full costs, marginal costs, minimum costs)
 Target costing: Definition, suitability of TC, Target costs, cost gap,
How to close cost gap, Kay features of target cost, Process/ steps,
Benefits of TC, implications

•Pricing Strategies
 5 common strategies: premium pricing, penetration pricing,
market skimming, differential pricing, loss leader
 Factors influencing pricing Decision: internal & external factors
 Pricing decisions
are the choices businesses
make when setting prices for  Complex pricing is based on
their products or services. ... the originality of a product or
service and what customers
are willing to pay for it.
Pricing strategies
 Pricing is a major element of marketing any product,
and it is vitally important to set the right price. A
price that is too high or too low for the target market
can seriously affect sales

• premium pricing
• penetration pricing
• market skimming
• differential pricing
• loss leaders
 Pricing methods
1. Cost-based pricing - Price is set by adding a
certain mark-up above the cost of producing
and selling the product. Eg full costs, marginal
costs, minimum costs
2. Value-based pricing - Rather than focusing on
costs, price is based on the value of the product
as perceived by the buyer. Eg target costing
.
 Cost-based pricing
• Full costs
• Marginal costs
• Minimum costs
 Target costing
• Target costing is not just a method of costing, but
rather a management technique where prices are
determined by market conditions
• several factors:
• homogeneous products,
• level of competition,
• no/low switching costs for the end customer,
• management wants to control the costs, as they
have little or no control over the selling price.
 How to close the cost gap
• re-design products
• reducing materials costs
• eliminate non value-added activities etc
Key Features of Target Costing
 Page 774: Textbook

• How to set target costs?

• How to achieve target costs?
 Key Features of Target Costing
• The price of the product is determined by market conditions. The
company is a price taker rather than a price maker.
• The minimum required profit margin is already included in the
target selling price.
• It is part of management strategy to focus on cost reduction and
effective cost management.
• Product design, specifications, and customer expectations are
already built in while formulating the total selling price.
• The difference between the current cost and the target cost is
the “cost reduction,” which management wants to achieve.
• A team is formed to integrate activities such as designing,
purchasing, manufacturing, marketing, etc. to find and achieve the
target cost.
 Advantages of Target Costing
• It shows management’s commitment to process
improvements and product innovation to gain competitive
advantages.
• The product is created from the expectation of the
customer and hence cost is also based on similar lines.
Thus, the customer feels more value is delivered.
• With the passage of time, the company’s operations
improve drastically, creating economies of scale.
• The company’s approach to designing and manufacturing
products becomes market-driven.
• New market opportunities can be converted into real
savings to achieve the best value for money rather than to
simply realize the lowest cost.
 Example 1

• ABC Ent operates in a very competitive market. It sells

packaged food to end customers. ABC Ent can only
charge RM20 per unit. If the company’s intended profit
margin is 10% on the selling price, calculate the target
cost per unit.

• Solution:
• Target Profit Margin = 10% of 20 = RM2 per unit
• Target Cost = Selling Price – Profit Margin
= RM20 – RM2
• Target Cost = RM18 per unit
 Process of target costing
The process of target costing can be divided into three sections:
•the first section involves in market-driven target costing, which
focuses on studying market conditions to identify a product’s
allowable cost in order to meet the company’s long-term profit
at expected selling price;
•the second section involves performing cost reduction
strategies with the product designer’s effort and creativity to
identify the product-level target cost;
•the third section is component- level target cost which
decomposes the production cost to functional and component
levels to transmit cost responsibility to suppliers.

17
 Pricing needs to match your target market

“It’s important when you are

pricing is one of considering your price that you realize
the most it is not for yourself, but for your target
important customers,” says Dolansky.
aspects of your
market strategy
 the difference between pricing policy
and pricing strategy
• Pricing policy is the determination of what
price a business will charge for a product or
service
• Pricing strategy is the use of pricing policy to
identify a product's or service's optimum
price in the marketplace