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Pricing Decisions and Pricing Decisions and Cost Management Cost Management

Prof. Sarbesh MishraProf. Sarbesh Mishra

Finance Area.Finance Area.

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Name Name :: Sarbesh MishraSarbesh Mishra Qualifications Qualifications :: 1.1. B.Com.(Hons)B.Com.(Hons)

2. 2. Post-graduate Post-graduate Commerce.Commerce. 3.3. M.Phil (Commerce)M.Phil (Commerce) 4.4. Ph.D. (Commerce) submitted.Ph.D. (Commerce) submitted.

ExperienceExperience : : Joined in University of Delhi as Joined in University of Delhi as Lecturer in Commerce in 2001 and Lecturer in Commerce in 2001 and continued till 2005 and then joined continued till 2005 and then joined Army Institute as Senior Faculty, Army Institute as Senior Faculty, Finance Area prior to current Finance Area prior to current appointment at NICMAR.. appointment at NICMAR..

ABOUT MYSELF ABOUT MYSELF

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Popular BeliefsPopular Beliefs

““ It is unwise to pay too much, but it’s It is unwise to pay too much, but it’s

worse to pay too little. When you pay too worse to pay too little. When you pay too

little, you sometimes lose everything little, you sometimes lose everything

because the thing you bought was because the thing you bought was

incapable of doing the thing you bought it incapable of doing the thing you bought it

to do.to do.

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Contd….Contd….

““ The common law of business The common law of business balance prohibits paying a little and balance prohibits paying a little and getting a lot – it can’t be done.”getting a lot – it can’t be done.”

John Ruskin (1819-1900)John Ruskin (1819-1900)British Poet, Scientist and PhilosopherBritish Poet, Scientist and Philosopher

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Contd….Contd….

““Price has no meaning except in terms Price has no meaning except in terms of the quality of the product.”of the quality of the product.”    

Dr. W. Edwards Deming (1900-1993)

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

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IntroductionIntroduction

Pricing decisions are management decisions Pricing decisions are management decisions about what to charge for the products and about what to charge for the products and services that companies deliver.services that companies deliver.

To maximize operating income, companies To maximize operating income, companies produce and sell units as long as the revenue produce and sell units as long as the revenue from an additional unit exceeds the cost of from an additional unit exceeds the cost of producing it.producing it.

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Learning ObjectivesLearning Objectives

1 Discuss the three major influences on pricing Discuss the three major influences on pricing decisionsdecisions

2 Distinguish between short-run and long-run Distinguish between short-run and long-run pricing decisionspricing decisions

3 Price products using the target-costing approachPrice products using the target-costing approach4 Apply the concepts of cost incurrence and Apply the concepts of cost incurrence and

locked-in costslocked-in costs

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Contd….Contd….

Discuss the three major Discuss the three major influences on pricing decisionsinfluences on pricing decisions

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Major Influences on Major Influences on Pricing DecisionsPricing Decisions

1 CustomersCustomers2 CompetitorsCompetitors3 CostsCosts The price of a product or service is the The price of a product or service is the

outcome of the interaction between the outcome of the interaction between the demand for the product or service and its demand for the product or service and its supply.supply.

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Major Influences on Major Influences on Pricing DecisionsPricing Decisions

1 Customers Customers influence prices through their influence prices through their effect on demand.effect on demand.

Companies must always examine pricing Companies must always examine pricing decisions through the eyes of their customers.decisions through the eyes of their customers.

Too high a price may cause customers to Too high a price may cause customers to reject a company’s product.reject a company’s product.

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Major Influences on Major Influences on Pricing DecisionsPricing Decisions

2 CompetitorsCompetitors influence prices through their influence prices through their actions.actions.

Alternative or substitute products of a Alternative or substitute products of a competitor may affect demand and force a competitor may affect demand and force a business to lower its prices.business to lower its prices.

Fluctuations in the exchange rates of different Fluctuations in the exchange rates of different countries’ currencies also affect pricing countries’ currencies also affect pricing decisions.decisions.

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Major Influences on Major Influences on Pricing DecisionsPricing Decisions

3 CostsCosts influence prices because they affect influence prices because they affect supply.supply.

The lower the cost relative to the price, the The lower the cost relative to the price, the greater the quantity of product the company greater the quantity of product the company is willing to supply.is willing to supply.

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Contd….Contd….

Distinguish between Distinguish between short-run and long-run short-run and long-run

pricing decisionspricing decisions

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Time Horizon of Time Horizon of Pricing DecisionsPricing Decisions

Most pricing decisions are either short run Most pricing decisions are either short run or long run.or long run.

Short-run decisions typically have a time Short-run decisions typically have a time horizon of less than a year.horizon of less than a year.

– Pricing a one-time-only special order Pricing a one-time-only special order – Adjusting product mix and output volumeAdjusting product mix and output volume

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Time Horizon of Time Horizon of Pricing DecisionsPricing Decisions

Long-run decisions involve a time horizon Long-run decisions involve a time horizon of a year or longer.of a year or longer.

– Pricing a product in a major market where Pricing a product in a major market where price setting has considerable leeway (Amount price setting has considerable leeway (Amount of freedom in the way you want to )of freedom in the way you want to )

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Value EngineeringValue Engineering

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

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Price Discrimination LawsPrice Discrimination Laws

Predatory pricing occur when:Predatory pricing occur when:1 the predator company charges a price that is the predator company charges a price that is

below an appropriate measure of its costs, andbelow an appropriate measure of its costs, and2 the predator company has a reasonable the predator company has a reasonable

prospect of recovering in the future the money prospect of recovering in the future the money it lost by pricing below cost.it lost by pricing below cost.

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Price DiscriminationPrice Discrimination

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

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Thank YouThank You