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Accounting and finance for
managers: a decision-making
approach
Chapter 8:
Pricing decisions
Learning outcomes

After studying this chapter, the reader will be able
to:
 Recommend appropriate costing methods for
pricing.
 Assess the potential impact of different
competitive environments on pricing.
 Identify appropriate pricing strategies to fit
different markets and products/services.
Topics covered



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Costing and pricing – different approaches to
costing.
Consumer behaviour and pricing.
Competitor behaviour and pricing.
Pricing new products or services.
Product life cycle and pricing.
Special pricing strategies.
The pricing decision
The pricing decision



The accountant’s perspective: the relationship between
revenues and costs. The sales price must generate a
profit.
The economist’s perspective: the competitive
environment – different market types have an impact on
the ability of a business to control its own pricing.
The marketer’s perspective: how customers react to
prices and how pricing should be integrated into the
overall marketing mix.
Costing and pricing

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Absorption costing and full-cost-plus pricing
Marginal-cost-plus pricing
Activity-based costing and pricing
Life-cycle costing and pricing
Absorption costing and full-cost-plus pricing

The ‘3 A’s’ of absorption costing:
Allocate
 Apportion
 Absorb

The overhead absorption rate (OAR)
OAR =
Total overhead costs
Labour hours worked
Mark-up and margin
Mark-up = Profit
Cost
Margin = Profit
Price
Traditional absorption costing
Activity-based costing
Costs
Life-cycle pricing
Costs
Revenue
Profits
Price elasticity of demand
PED =
Percentage change in demand
Percentage change in price
Price inelasticity
Price elasticity
What determines elasticity?
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The relative price of the goods
The price of other goods
Consumer income
Tastes and fashions
Expectations
Obsolescence
Four types of market

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
Perfect competition
Monopoly
Monopolistic competition
Oligopoly
The marketing mix

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
Price
Product
Promotion
Place
Product positioning
High quality
A
B
Low
High
price
price
C
D
Low quality
Price positioning strategies
High Price
Competitor
Prices
Skimming Pricing
Optional Pricing
Premium Pricing
Stratified Pricing
Competitive Pricing
Value Pricing
Bundle Pricing
Penetration Pricing
One-off Pricing
Low Price
The target costing process
Price
(Set by
Market)
Margin
(set by
Mgment)
Existing
costs
Target
costs
Target
cost
structure