Lecture 6: Costing and Pricing Decisions
This lecture we will be focusing on pricing, costing being a part of it. We will be
discussing major factors that affect the pricing decisions and long term and short
term decision making. We will also be discussing the different pricing strategies.
• Pricing decisions are management decisions about what to charge for
the products and services that companies deliver. The strategy is to
either price low and sell more or price high and derive the profit from
mark-ups.
• To maximise operating profit, companies produce and sell units as long as
the revenue from an additional unit exceeds the cost of producing
it.
Major influences on the pricing decisions:
1. Market positioning:
• Companies position themselves in certain markets and this may
influence product prices. For example one company might target a
more elite market whereas the other would focus on a low price,
high volume market.
• A firm with a reputation for very high quality and prestigious
products may set a high price, consistent with that image because
you expect the demand to be low but you expect the people to pay
for it.
• An overemphasis on price cutting can damage a product’s image,
and reduce profitability
2. Product costs:
• In the long term, firms must produce at a cost below selling price
(Target Costing). Over the long term even the fixed costs should be
covered.
• The importance of product cost in price setting varies across
industry and even within firms.
• Even when a firm sets a price below cost, it is still important to have
an awareness of product cost for product mix decisions etc.
3. Customer value:
Look at a similar product line, its key targets, pricing, and resources. Looking at
the value customer actually gains and the price that they are willing to pay.
• The difference between the value that a customer gains by owning
and using a product, and the price paid for the product
This lecture we will be focusing on pricing, costing being a part of it. We will be
discussing major factors that affect the pricing decisions and long term and short
term decision making. We will also be discussing the different pricing strategies.
• Pricing decisions are management decisions about what to charge for
the products and services that companies deliver. The strategy is to
either price low and sell more or price high and derive the profit from
mark-ups.
• To maximise operating profit, companies produce and sell units as long as
the revenue from an additional unit exceeds the cost of producing
it.
Major influences on the pricing decisions:
1. Market positioning:
• Companies position themselves in certain markets and this may
influence product prices. For example one company might target a
more elite market whereas the other would focus on a low price,
high volume market.
• A firm with a reputation for very high quality and prestigious
products may set a high price, consistent with that image because
you expect the demand to be low but you expect the people to pay
for it.
• An overemphasis on price cutting can damage a product’s image,
and reduce profitability
2. Product costs:
• In the long term, firms must produce at a cost below selling price
(Target Costing). Over the long term even the fixed costs should be
covered.
• The importance of product cost in price setting varies across
industry and even within firms.
• Even when a firm sets a price below cost, it is still important to have
an awareness of product cost for product mix decisions etc.
3. Customer value:
Look at a similar product line, its key targets, pricing, and resources. Looking at
the value customer actually gains and the price that they are willing to pay.
• The difference between the value that a customer gains by owning
and using a product, and the price paid for the product
