Decoding the Relationship between Pricing Decisions and Cost Management
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Which factors affect pricing decisions?
- Customers affect prices through effect on demand for a particular product
- Competitors affect prices through their actions
- Costs affect prices as they influence supply
Pricing decisions and cost management homework help goes on to reveal the time horizon that affect the prices of goods and services.
Short-run pricing decisions cover less than a year time horizon while long-run decisions consider a time horizon of more than a year or even longer. Short-run pricing decisions involve a one-time pricing or special order pricing. This implies a particular batch of goods and services marketed with a special price tag. In a long-run a product is marketed through somewhat leeway pricing. You carry out a continuous mix of inputs and outputs in order to maximize revenue generation for your firm.
Basic features of time-horizon of pricing decisions
- Short-run pricing decisions involves irrelevant costs, however you find the same cost becomes a significant game changer during long-run.
- Long-run pricing decision is driven by profitability factor of return on investment.
- Short-run bottom price is variable cost of one-time special order.
- Long-run bottom price is the cost of resources used as input.
- Competition in the segment of similar products in long-run pushes the cost downward.
You must consider the opportunity cost lost in catering to one-time customer as you lose out on the existing loyal customers. Pricing decisions and cost management assignment help tells you how to deal with long-run pricing of your goods and services.
Long-run pricing approaches
- Market based approach
- Cost based approach
In a market based approach, we deal with target price and target cost. Target price is the maximum price a customer is willing to pay for the designated goods and service. We arrive at target cost per unit by lessening the target operating income per unit from target price.
Pricing decisions and cost management homework help describes the process involved in deciding target price and target cost:
- Develop a product keeping in mind the taste and preference of your target customer. For example, you need to single out the market segment you are planning to cater. Make sure your product appeals to the given segment.
- Define a target price and evaluate the possibility of sales at that price.
- Derive a target cost per unit and estimate a target return rate on the investments you make. Make sure you do not make your loyal customers negotiate hard on affordability despite ranking high on their favorable product list.
- Apply open book costing and value engineering theory to arrive at your target cost.
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