Management Accounting - Setting Prices
Management Accounting Tutorial 5
15-3. List and briefly describe 4 major influences on pricing decisions
Customer Demand: the demands of customers are of paramount importance in all phases of business operations, from the design of a product to the setting of its price. Product-design issues and pricing considerations are interrelated, so they must be examined simultaneously. For example, for a higher quality product; you need higher quality materials which will affect a higher cost and needs more time and this will lead to a higher pricing on a product. Also, a manager must not price its product out of the market price range.
Actions of Competitors: companies must keep an eye on its competitors. If its competitor reduces its pricing on a product, they might have to follow suit to avoid losing its market share. However, one must not follow the actions of its competitors’ blindly as a company has to predict competitive reactions to its product-design and pricing strategy. The company must also be careful to properly define its product, such that if they increase the price of the product; will the consumers continue purchasing the product?
Costs: some prices are determined almost entirely by market forces. Industries such as agriculture; where most products are market-driven. To make a profit, farmers must produce at a cost below the market price. This is very risky as it is not always possible to produce at a price lower than the market price and this will inevitably lead to losses for the farmers. In other industries, prices are set by adding a markup to production costs so managers do have some latitude in determining the markup.
Therefore, both market forces and cost considerations heavily influence prices. No organization or industry can price its products below their production costs indefinitely. And no company’s management can set prices blindly at a cost plus a markup without keeping an eye on the market.
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