| What are the major influences on pricing? | 1. Customers
- Different price and product preferences, willingness to pay
- Dynamic pricing
2. Competitors
- Pricing is influenced by competitors’ decisions and reactions.
- Game theory
3. Costs
- Costs affect supply and thus indirectly prices.
- Product profitability depends on selling prices and costs. |
| What is the difference between short run and long run pricing decisions? | Short run decisions have a time horizon less than 1 year. Fixed costs are mostly irrelevant in short run decisions because you cannot change fixed costs in the short run.
Long run decisions have a time horizon of more than 1 year. Fixed costs are taken into consideration because these can be changed in the long run. |
| What is the target cost pricing method? | All costs (Fixed + variable) are relevant because target costing operates on long run decisions.
1. Develop product that satisfies needs of potential customers.
2. Choose target price: estimated price that potential customers are willing to pay.
3. Choose target operating profit per unit.
4. Derive target cost per unit: estimated long-run cost per unit, which allows to earn the target operating profit.
5. Perform value engineering to achieve target costs. |
| What is value engineering? | Value engineering is the continuing evaluation of all value-added and non-value added costs and how to reduce these by for instance change product design, adjusting production volume etc. It's about reducing costs while satisfying customers needs. |
| What is the cost-plus pricing method and how do you use it? | This pricing method calculates the unit cost and add a mark-up to this.
The mark up can be calculated as shown by the picture. |
| What are the three pricing methods? | 1. Target cost pricing method.
Here we make the product, find an estimated price customers are willing to pay, choose target operating profit per unit, derive total cost per unit long-term, and perform value engineering to achieve those costs.
2. Cost-plus pricing method.
Add a markup to the unit cost.
3. Life-cycle product costing
ALL costs during the product entire lifespan are calculated into the price. Hence, costs are calculated all the way from R&D to when product is ready to be shipped.
Early-stage costs are highlighted. |
| What is the difference between cost incurrence and locked-in costs? | Cost incurrence: Resources are sacrificed or used up.
Locked-in costs: Not yet incurred but will be incurred based on past decisions. |
| What is customer profitability analys? | We analyze the profitability of each customer to see what customers to focus on. We do this by ranking each customer, depending on profit or revenue.
This can answer the following questions:
1. How many profitable/unprofitable customers do we have?
2. Who are our most valuable customers?
3. What is the magnitude of losses of unprofitable customers?
4. How diverse are customers with respect to their profit contribution? |
