Introduction To Pricing Principles

MBAM964 MA1 – Pricing Principles Overview A&F
Knowledge and Understanding

Element
Introduction
A. Economic Pricing Basics
B. Marketing Pricing Basics
C. Life Cycle Pricing Considerations
D. Accounting Approach to Pricing Introduction
Topic Aims
 Understand and apply the various perspectives, factors, and complexities in pricing decisions
Topic Assessment
 Advise an organisation on considerations in its pricing decisions (individual research to be
undertaken and evidenced).
Dyson, J. R., & Franklin, E. (2020). Accounting for Non-Accounting Students 10th Edition
https://librarysearch.exeter.ac.uk/permalink/44UOEX_INST/9u3b61/cdi_askewsholts_vlebooks_9781292286976
Chapter 18: Decision Making
 Sections: Pricing Decisions (p410 – p412)
Chapter 20: Emerging Issues
 Sections: Product Life Cycle; Target Costing
Warner, S., & Hussain, S. (2017). The Finance Book.
Chapter 32 – Profitable pricing
From MBAM960 Marketing: Kotler; Keller; Chernev (2021). Marketing Management, Global
Edition 16e
 Chapter 11 – Managing Pricing and Sales Promotions (page 265 in 16e)
https://librarysearch.exeter.ac.uk/permalink/44UOEX_INST/5mg45k/alma991015835449707446
Najjar.D. (2019) What Should You Consider When Making Pricing Decisions?
https://www.thebalancemoney.com/what-to-consider-when-making-pricing-decisions-4083152
Purpose: to consider the different options for pricing, so you can consider and advise on those that are most appropriate and relevant to
different types of business.
Introduction to Pricing
Price: the amount for which a product or service is sold to a customer
Management Decision: How much should we charge?
One costs less than £5 one costs

£160.
Activity: list possible reasons why?
The £160 t-shirt is reduced to £100

Activity: List possible reasons why?
List risks or benefits to seller?
ACTIVITY: Other considerations

regarding the pricing differences?
Allocate your responses to these possible headings:

ECONOMIC MARKETING ACCOUNTING
1
Pricing is a key concern of managers. Prices represent one of the most effective opportunities to boost
profits. The right price can boost profit; the wrong price can shrink it just as quickly.
As you read through this section, think of examples of products, services, industries, and events that
seem to adopt each pricing principle.
A. Economic pricing principles
Demand > Supply Price
Demand < Supply Price
Hand sanitiser sold for £360 on Amazon as vendors take advantage of coronavirus Emma
Brazell Wednesday 4 Mar 2020 5:16 pm
https://metro.co.uk/2020/03/04/hand-sanitiser-sold-360-amazon-vendors-take-advantage-coronavirus-12345298/?ito=cbshare
Price Elasticity of Demand: assumes relationship between demand in response to price

By how much demand goes up or down in relation to changes in price depends on the elasticity of the
product - The sensitivity of demand to a change in price
Inelastic
Price: Demand:
Elastic:Price: Demand:
Figure 11.1 Inelastic and Elastic Demand; Kotler (2021) Marketing
Management, Global Edition 16e, page 270
where the demand of a product or service where the demand of a product or service
changes little with a change in the price changes greatly to a change in the price
 Close substitutes
 No close substitutes
 Easy for customers to switch
SHAWN MCINTYRE: Economics For Beginners: Supply And Demand JUL 30, 2016
https://owlcation.com/social-sciences/Economics-For-Beginners-Supply-And-Demand
2
B. Marketing pricing methods

Perceived Value Customers’ Competitors’ Strategic focus
(value positioning)
needs/desires actions (e.g., on corporate objectives, branding etc)
Examples: These may be temporary or permanent
Price • High prices are set to take advantage of consumers wanting to be one of the
skimming first people to get the new product.
• Products with short life cycles
• High-Tech or High Research and Development costs have been incurred
Price cutting • Low prices are set, aiming for higher market share.
(penetration) • Requires price-sensitive market (i.e., elastic demand).
• May promote complementary and captive products.
Perceived • Considers buyers' perception of value, rather than the seller’s costs.
value • The brand becomes the selling point that adds value due to the “experience” it
offers
Going rate • Price set to match prices of competitors.
• Encourages non-price competition, e.g., through advertising, promotion, etc.
E.g., Fuel
Price • Different prices according to different: Customers; Location; Timing
discrimination e.g., students; UK; Christmas Travel
Price • Offers more than one service or product within price
bundling • Works on the perceived value from the customer on their packaged deal.
Price • Advertising products at a lower rate by offering a good price for the very basic
unbundling component, then adding extra price structures for any additions.
• Can attract immediate attention from the consumer as they see what looks to be
a very attractive offer.
ACTIVITY: Identify companies or products/services that seem to adopt the above as part of their
pricing strategy/ies? What about these?
https://www.youtube.com/watc https://youtu.be/lqV https://youtu.be/rjHy Shell https://youtu.be/GlYt https://www.youtube.c

h?v=HJ3Lm0r-jhI; 7_vhdhI fcpbi0I om/watch?v=XHTrLYSh
qooA5jvY
BRQ
C. Life Cycle Pricing Considerations
Pre-launch Introduction Growth Maturity Decline Extension/Death
3
Pettinger. T. (2022): Product Life Cycle https://www.economicshelp.org/blog/140934/business/product-life-cycle/

Apple’s strategic pricing strategy: http://finance.yahoo.com/news/apple-premium-pricing-strategy-product-
191247308.html (2014)
D. The Accounting approach (Intro)
Financial Reporting study:

Success Performance Profit
FA: Financial Reporting £

Sales Revenue X Price x Quantity (or volume)
Less Cost of Sales (x) Costs of providing product/service
Less Operating Costs (x) costs of operating the business
Operating Profit X If Total Sales Revenue > Total Costs
Less Financing Costs / Income (x)

Less Taxation (x)
Profit for the Year X
Accountants use cost as the basis for pricing decisions

Sales Revenue > Costs
Sales price per unit > cost per unit
Profit per unit
Cost Profit Price
Difference between cost per unit and the selling price per unit
Often calculated as Cost per unit + % of cost per unit

Mark-Up or Margin
If Selling price per product is to be 40% higher than its costs of £10
i.e., selling price is calculated as 40% of the cost
Selling price = £10 x 1.40 (or £10 + (£10 x 40%))
PRICING DECISIONS
 Complex and unique to each product, business, customer, market, industry?
 Najja.D (2022): “… should first be based on how much it costs you to make or how much time it costs you
to do the job.” “…consider what your competitors are doing with their pricing strategy.” “Psychological
pricing is also a factor to consider.” Do you agree?

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MBAM964 MA1 – Pricing Principles Overview A&F

Knowledge and Understanding

Management Decision: How much should we charge?

One costs less than £5 one costs

The £160 t-shirt is reduced to £100

ACTIVITY: Other considerations

Allocate your responses to these possible headings:

A. Economic pricing principles

Demand > Supply Price

Demand < Supply Price

Price Elasticity of Demand: assumes relationship between demand in response to price

B. Marketing pricing methods

https://www.youtube.com/watc https://youtu.be/lqV https://youtu.be/rjHy Shell https://youtu.be/GlYt https://www.youtube.c

C. Life Cycle Pricing Considerations

Pre-launch Introduction Growth Maturity Decline Extension/Death

Pettinger. T. (2022): Product Life Cycle https://www.economicshelp.org/blog/140934/business/product-life-cycle/

D. The Accounting approach (Intro)

Financial Reporting study:

FA: Financial Reporting £

Less Operating Costs (x) costs of operating the business

Operating Profit X If Total Sales Revenue > Total Costs

Less Financing Costs / Income (x)

Accountants use cost as the basis for pricing decisions

Often calculated as Cost per unit + % of cost per unit

Selling price = £10 x 1.40 (or £10 + (£10 x 40%))

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