Notes. CIMA Paper P2. Management Performance

Transcription

1 Chapter 1 extract from our ExPress notes for use with the current video. A full set of P2 ExPress notes can be downloaded free of charge at CIMA Paper P2 Management Performance For exams in 2011 Notes CHAPTER 1

2 KEY KNOWLEDGE Pricing strategies External pricing considerations Good businesses do not compete on price alone, but seek to differentiate their products and services. Intelligent pricing nevertheless is a key component of strategy. This is especially true in recessionary economic climates. Price-Quality Relationship A priori one would expect a positive correlation between price and quality. High Skimming Premium Price Low Economy Penetration Low Quality High The four principal pricing strategies are shown in the above quadrants. The more interesting ones involve High-Low and Low-High combinations. There are a variety of pricing strategies with which one should be familiar: Cost plus: A markup is added to a given cost base (which can be variable or full production cost). Page 2

3 Skimming: Enter the market at a high price to catch customers willing and able to pay the price; pricing can subsequently be reduced to expand market. Penetration pricing: Go in at a very low price to win market share; pricing can subsequently be increased once share is won. Premium pricing: Maintain a high price due to the nature of the product. Target pricing: Determining the price at which a product will be competitive and working back through required profit to determine the cost limits; this is the flip side of the target cost approach. Economy (pricing): This is a no frills low price. Promotional Pricing: These are in support of campaigns to raise customer awareness of a product. Perceived value pricing: Plays on perception of value and what the market is willing to pay. MR = MC: Marginal revenue = Marginal cost. Value Pricing: Increasing the value content of the product so as to defend market share (in times of difficult economic conditions or competition). Product-line pricing: Determining the pricing of particular items in a line of products which are closely linked with one another so as to maximize overall gain. Product range pricing: Sell a core product cheaply and price high related products. Volume-discounting pricing: The bigger the order, the lower the price per unit. Discriminatory pricing: Pricing the same product at different levels in different markets (geographical) or market segments (customers). Page 3

4 Price differentiation: Pricing the same product at different levels in different markets. Geographical Pricing: Similar to price differentiation. Psychological Pricing: Plays on the emotion of the consumer. Product Bundle Pricing: Combining products into one pack and pricing it overall. Complementary product pricing: This refers to products that are used in conjunction with other products (e.g. printers and cartridges, razor grips and blades, staplers and staples, automobiles and spare parts). The approach to pricing may be low for the main product and more expensive for the re-fills ; alternatively, the approach may be a high initial price and cheaper for subsequent products/services. Relevant cost pricing: Basing the price on a keen (accurate) understanding of the real costs of the product or service. Captive Product Pricing: Similar to product range but product is more closely tied to the initial product. Competitive pricing: Using competitors as a benchmark. Product Line Pricing: The overall price reflects the benefits provided by the constituent parts. Optional Product Pricing: The pricing of additional products and services once the customer has made the initial purchase. It is important not to fixate on pricing. It is only one of the four components in the marketing mix of a company, the famous 4 P s of marketing: Price Product Place Promotion Page 4

5 KEY KNOWLEDGE Joint Products / By-products Joint products are two or more products that share a common processing path until the point of separation. Until they go their own (separate) ways, the costs of production during the joint processing cannot be physically distinguished. There are different methods used to apportion common costs to such products at the point of separation: Market value (based on expected sales price) Number of units (litres, tons, or some other objective physical measurement) Net realizable value = Final sales value Incremental processing costs By-products are goods which are incidental to the production process and which generate cash from sales, though the amount is modest in comparison to the overall revenues of the firm. The cash received for by-products can be viewed as a bonus that reduces production costs. Page 5