Understand the long term strategic issues involved

  • Monash University
  • ACC 2200
  • Test Prep
  • lys937171909
  • 64
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Understand the long-term strategic issues involved with determining product mix Pricing effective price setting requires a constant interplay between market considerations and cost awareness 1. Major Influences on Pricing Decisions 1) Product Costs In the long term, firms must produce at a cost below selling price The importance of product cost in price setting varies across industries - Example: staples, utilities, fruit government agencies set cap prices = to what extent prices can be set Even when market forces (ie. competitor’s behaviour) influence a company to price its products, it is still important to have an awareness of product cost Product cost may be used to establish a starting point for setting prices 2) Customer Value The value that a customer places on particular features of a product (how much a product is worth on monetary value?) The difference between the value that a customer gains by owning and using a product, and the price paid for the product, is the net value to the customer (the greater the net value, more impression that it is value for money) Understanding customer value is a critical aspect of not only price setting, but also product creation (investing in gaining feedback) Businesses must understand the specific aspects of a product or service that provides value to the customer 3) Market Positioning Companies position themselves in certain markets and this may influence their product or service prices - Example: Hyundai position themselves in the middle level income families A firm with a reputation for very high quality prestigious products may set a high price consistent with that image - An overemphasis on price cutting can damage a product’s image and reduce profitability - Example: Louis Vuitton never has any sales or discounts
4) Competitor’s Behaviour Competitor’s pricing behaviour can affect a company’s pricing decisions Management must take care to define its product and market it correctly Predicting competitor’s reactions is a difficult but important task - Example: a company cannot blindly cut prices: Qantas couldn’t cut prices to compete with budget airlines so they came up with Jetstar (excellent strategy) 5) Legal, Political and Ethical Issues Managers must adhere to the laws when setting prices The law generally prohibits companies from discriminating between customers in setting prices Political pressures may lead to intervention in the setting of prices Ethical considerations may need to be considered, including deceptive practices Legal Restrictions on Pricing The ACCC has the power to outlaw the following behaviours: o Predatory Pricing when a company reduces their prices to force a competitor out of the market o Price Discrimination when a company offers different prices, discounts, services of payment terms to different customers for the same goods or services o Resale Price Maintenance when a supplier dictates the minimum prices that goods or services are to be

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