Pricing and Other Product Management Decisions

Slides:



Advertisements
Similar presentations
Pricing Decisions and Cost Management
Advertisements

CHAPTER 8 PRICING Study Objectives
Accounting Information, Relevant Costs, and Decision Making
Module 20 Pricing and Related Decisions. The Value Chain The set of value-producing activities that stretches from basic raw materials to the final consumer.
Competing For Advantage
New-Product Development and Product Life-Cycle Strategies 9 Principles of Marketing.
Pricing Decisions and Cost Management
4. Building Competitive Advantage Through Functional-Level Strategy
An Overview of Marketing
Pricing Decisions EMBA 5411 Budgeting and Pricing.
© 2014 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license.
©2015 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.
9-1 Strategy Management of Price, Cost, and Quality C hapter 9 Prepared by Douglas Cloud Pepperdine University.
Marketing Concept The Competitive Philosophy For Reaching Goals Ted Mitchell.
Cost Management. learning objectives cost/volume/profit (CVP) relationships and break-even analysis break-even chart – low fixed costs, high variable.
Marketing by the Numbers
25 Pricing Decisions, Including Target Costing and Transfer Pricing
9 Differential Analysis and Product Pricing Managerial Accounting 13e
0 CHAPTER 15 The Strategic Use of Managerial Accounting Information © 2009 Cengage Learning.
© The McGraw-Hill Companies, Inc., 2008 McGraw-Hill/Irwin Financial & Managerial Accounting The Basis for Business Decisions FOURTEENTH EDITION Williams.
Building Competitive Advantage Through Functional-Level Strategies
If the primary determinant of a firm's profitability is the attractiveness of the industry in which it operates, an important secondary determinant.
Chapter Nine New-Product Development and Product Life-Cycle Strategies Copyright ©2014 by Pearson Education, Inc. All rights reserved.
Pricing Decisions, Including Target Costing and Transfer Pricing 12.
Chapter 1 Market-Oriented Perspectives Underlie Successful Corporate, Business, and Marketing Strategies.
Strategic and Financial Logistics
Profit Planning Chapter 9 Chapter 9: Profit Planning
Business for Health Business Skills for Private Medical Practices
Profit Planning Master Budget Chapter 7
Chapter 3: Cost Estimation Techniques
Activity-Based Management and Activity-Based Costing
COST ANALYSIS FOR CONTROL
11 Pricing Decisions, Including Target Costing and Transfer Pricing
The Fundamentals of Managerial Economics
MGT301 Principles of Marketing
Chapter 1 Cost control & cost reduction
Information for Decision-making Chapter Ten:
Pricing Decisions and Cost Management
Chapter 19 Pricing Strategies.
Principles of Marketing
Pricing Considerations
Supplier Partnership Supplier Partnership is the discipline the strategically planning for, and managing, all interactions with third party organization.
Principles of Marketing
McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.
Pricing and Product Strategy
Pricing and Related Decisions
Understand that corporate-level strategies include decisions regarding diversification, international expansion, and vertical integration Describe the.
Chapter 9- slide 1 Copyright © 2009 Pearson Education, Inc. Publishing as Prentice Hall Chapter Nine New-Product Development and Product Life-Cycle Strategies.
An Introduction to Retailing
Chapter 8: Selecting an appropriate price level
Price strategy: Pricing Methods
Marketing Management Module 1
Chapter 16 Lean Accounting
Building Competitive advantage through functional level strategies
New-Product Development and Product Life-Cycle Strategies
The Accountant’s Role in the Organization
Chapter 25 Price Planning.
BUSINESS LEVEL STRATEGY
Relevant Information and Decision Making: Marketing Decisions
Building Competitive advantage through functional level strategies
Managerial Accounting 2002e
Cost-Volume-Profit Analysis and Planning
Key terms & New product development
Pricing Decisions and Cost Management
Creating and Capturing Customer Value
Strategic and Financial Logistics
New-Product Development and Product Life-Cycle Strategies
New-Product Development and Product Life-Cycle Strategies
New-Product Development and Product Life-Cycle Strategies
Building Competitive Advantage Through Functional-Level Strategies
Presentation transcript:

Pricing and Other Product Management Decisions Module 21 Pricing and Other Product Management Decisions © Cambridge Business Publishers, 2018

1 Explain the importance of the value chain in managing products and describe the key components of an organization’s internal and external value chain. © Cambridge Business Publishers, 2018

The Value Chain The set of value-producing activities that stretches from basic raw materials to the final consumer Each product or service has a separate value chain All entities along the value chain depend on the final customer’s perception of the value and cost of a product or service Goal of every organization is to maximize the value, while minimizing the cost of a product or service to final customers. © Cambridge Business Publishers, 2018

Three Levels of the Value Chain First Level: Business entities Refining the value chain into processes helps management understand how entities within the chain add and incur costs Collections of related activities intended to achieve a common purpose Second Level: Processes The units of work Third Level: Activities © Cambridge Business Publishers, 2018

Three Levels of the Value Chain The value chain for the paperboard cartons used to package beverages shows three levels with each successive level showing more detail. © Cambridge Business Publishers, 2018

Internal Processes of the Internal Value Chain Generic processes for an internal value chain: © Cambridge Business Publishers, 2018

Value Chain Perspective Fosters supplier-buyer partnerships Buyers deal with a reduced number of suppliers Relationships involve sharing customer and other data (internal processes) Common value chain is studied Often process modifications are made to reduce overall costs and share increased profits Virtual integration is the use of information technology and partnerships to allow entities along a value chain to act as if they are one economic entity. © Cambridge Business Publishers, 2018

Value Chain Perspective Fosters focus on core competencies Relationships with suppliers often begin to represent an extended family Creates a competitive advantage Suppliers can focus on efficient, low-cost manufacturing Manufacturer can focus on marketing and product development © Cambridge Business Publishers, 2018

Supplier-Buyer Partnership Example TAL Group is headquartered in Hong Kong and is a manufacturer of men's and women’s clothing. TAL has identified the value of partnering with customers and offers value chain solutions tailored to meet customers’ individual needs. Customers are identified as partners on their website and include companies such as Burberry, Chico’s, Nordstrom, and JCPenney. Source: http://www.talapparel.com/en/our-story/our-partners © Cambridge Business Publishers, 2018

Value-Added vs. Value Chain Perspectives Value-Added Perspective Value Chain Perspective Goal is to maximize the value-added. Goal is to maximize the value and minimize cost to final customers. Focus is on the cost of resources to the organization and the selling price of products or services to the customer. Often achieved by developing linkages or partnerships with suppliers and customers. © Cambridge Business Publishers, 2018

Distinguish between economic and cost-based approaches to pricing. 2 Distinguish between economic and cost-based approaches to pricing. © Cambridge Business Publishers, 2018

The Pricing Decision Important and complex decision for management Directly affects the salability and profitability of individual products or services Two pricing theories Economic approaches Cost-based approaches © Cambridge Business Publishers, 2018

Economic Approaches to Pricing Provide a useful framework for thinking about pricing decisions Based on cost and revenue functions Marginal revenue The varying increment in total revenue derived from the sale of an additional unit Marginal cost The varying increment in total cost required to produce and sell an additional unit of product Economic models are seldom used for day to day pricing decisions. © Cambridge Business Publishers, 2018

Cost-Based Approaches to Pricing Cost has traditionally been the most important consideration in pricing because Cost data are available. Feasible for setting prices in a short period of time Cost-based prices are defensible. Managers can argue they represent a fair profit Revenues must exceeds costs if the firm is to remain in business. Long run selling price must exceed the full cost of each unit © Cambridge Business Publishers, 2018

Cost-Based Pricing for a New Product Begin with market research * *Proposed price should be evaluated based on competition and what customers are willing to pay. © Cambridge Business Publishers, 2018

Cost-Based Pricing in Single-Product Companies Example Lawn Chopper mows lawns and has an annual facilities cost totaling $110,000. Each lawn mowed costs $18. Management desires to achieve an annual profit of $25,000 at an annual volume of 4,000 lawns. Profit = Total revenues – Total costs Known data are entered into the profit formula. $25,000 = (Price × 4,000) – ($110,000 + [$18 × 4,000]) Price = $51.75 per lawn A price of $51.75 per lawn will allow Lawn Chopper to achieve its desired profit totaling $25,000. © Cambridge Business Publishers, 2018

Cost-Based Pricing in Multiple-Product Companies Desired profits are obtained for entire company Standard procedures are established for determining initial selling prices of each product Typically include Cost assigned to the product or services Plus a markup to cover unassigned costs and to provide a profit © Cambridge Business Publishers, 2018

Cost-Based Pricing in Multiple-Product Companies Possible cost bases for markups based on behavior and function Direct materials costs Variable manufacturing costs Total variable costs (manufacturing, selling, and administrative costs) Full manufacturing costs © Cambridge Business Publishers, 2018

Markup on Cost Base General approach to developing a markup is to recognize that the markup must be large enough to provide for costs not included in the base, plus a profit. Costs not included in the base + Desired profit Costs included in the base Markup on cost base = © Cambridge Business Publishers, 2018

Variable Cost Basis Example Lawn Chopper has total assets of $320,000. Management desires an annual return of 9% on total assets. Fixed costs and expenses total $50,000, and variable costs and expenses total $180,000. Estimated variable costs per unit equals $15. Desired annual profit = 9% x $320,000 = $28,800 Markup on variable costs = $50,000 + $28,800 $180,000 = 0.438 Selling price = $15 + ($15 x 0.438) = $21.57 © Cambridge Business Publishers, 2018

Full Manufacturing Cost Basis Example Lawn Chopper’s fixed costs and expenses total $50,000, of which $10,000 are selling and administrative costs. Total variable costs and expenses total $180,000, with $30,000 of this amount selling and administrative costs. Estimated variable costs per unit equal $15 (with $1 of this selling and administrative costs). Desired annual profit = 9% x $320,000 = $28,800 = 0.362 Markup on full manufacturing costs $10,000 + $30,000 + $28,800 $190,000 = Selling price = $14 + ($14 x 0.362) = $19.07 Selling and administrative costs must be covered. © Cambridge Business Publishers, 2018

Cost-Based Pricing for Special Orders Used to bid on unique projects If the project requires Dedicated assets, or Acquisition of new fixed assets, or An investment in employee training The desired profit on the special order or project should allow for an adequate return on the additional investment. © Cambridge Business Publishers, 2018

Critique of Cost-Based Pricing If cost-based pricing does not have accurate cost assignments, some products could be priced too high and others too low. The higher the portion of unassigned costs, the greater is the likelihood of over- or underpricing individual products. Cost-based pricing assumes goods or services are relatively scarce and, generally, customers who want a product are willing to pay the price. In a competitive environment, cost-based approaches increase the time and cost of bringing new products to market. © Cambridge Business Publishers, 2018

3 Explain target costing and discuss its acceptance in highly competitive industries. © Cambridge Business Publishers, 2018

Allowable cost = Target cost of product or service Target Costing Starts with determining what customers are willing to pay for a product or service Then subtracts a desired profit on sales to determine the allowable cost of the product or service Allowable cost = Target cost of product or service Cost is communicated to the target costing team Team must design a product that meets customer price, function, and quality requirements while providing the desired profit © Cambridge Business Publishers, 2018

Target Costing and Cost Management Reflects the belief that costs are best managed by decisions made during product development Helps orient employees toward the final customer Reinforces the notion that all departments within the organization and through the value chain must work together © Cambridge Business Publishers, 2018

Target Costing in a Competitive Environment © Cambridge Business Publishers, 2018

Encouraging Design for Production Target costing keeps the customer's function, quality, and price requirements in the forefront at all times. Design for manufacturers Target costing forces product design engineers to explicitly consider the costs of manufacturing and servicing a product while it is being designed Examples Placing a side access panel in an appliance for easy access for repairs Using standard-size parts to reduce inventory Using molded parts to avoid assembling © Cambridge Business Publishers, 2018

Time Reduction to Introduce Products Eliminates the evaluation of marketability of a product at a cost-plus price and having to recycle the design though several departments Involving vendors makes the vendors aware of the necessity of meeting a target cost Facilitates concurrent engineering of components to be produced outside the organization and reduces time to obtain components © Cambridge Business Publishers, 2018

Target Costing Requirements Requires cost information Detailed information on the cost of alternatives activities is needed Allows decision makers to select design and manufacturing alternatives Requires coordination with all involved Need a basic understanding of the overall processes required to bring a product to market Should appreciate cost consequences Must respect, cooperate, and communicate with other team members © Cambridge Business Publishers, 2018

Pros and Cons of Target Costing Takes proactive approach to cost management Orients organization toward customer Breaks down barriers between departments Enhances employee awareness and empowerment Fosters partnerships with suppliers Minimizes non-value-added activities Encourages selection of lowest-cost-value-added activities Reduces time to market CONS To be effective, requires the development of detailed cost data Requires willingness to cooperate Requires many meetings for coordination © Cambridge Business Publishers, 2018

Product Life Cycles Products with a relatively long life go through four stages during their life cycle. Time Sales Revenue Maturity Sales level off. Price pressure increases. Price reductions could be needed. Growth Sales increase as product gains acceptance. Selling prices often remain high. Customers are loyal. Low competition. Decline Sales decline as product becomes obsolete. Significant price cuts needed to sell inventories. Start-up Sales are low. Often selling prices are high. Customers are affluent trendsetters. © Cambridge Business Publishers, 2018

Life Cycle Costs Lifecycle costs include all costs associated with a product or service including: Cost incurred with initial conception Design Pre-production Production After production support Cost management aided by target costing © Cambridge Business Publishers, 2018

Commitment and Expenditures Commitments and expenditures of organizations for high-technology products with relatively short product lives: © Cambridge Business Publishers, 2018

4 Illustrate the relation between target costing and continuous improvement costing. © Cambridge Business Publishers, 2018

Continuous Improvement (Kaizen) Costing A costing approach focused on continuous improvement Calls for establishing cost reduction targets for products or services Begins where target costing leaves off Often found in companies that have adopted a lean production philosophy Successful world-class companies use Kaizen to avoid complacency. © Cambridge Business Publishers, 2018

5 Explain how benchmarking enhances quality management, continuous improvement, and process reengineering. © Cambridge Business Publishers, 2018

Benchmarking is no longer regarded as spying. A systematic approach to identifying best practices to help an organization take action to improve performance Typically deals with Target costs for a product, service or operation Customer satisfaction Quality Inventory levels Inventory turnover Cycle time Productivity Benchmarking is no longer regarded as spying. © Cambridge Business Publishers, 2018

Benchmarking Provides measurements in setting goals Can lead to dramatic innovations Can help overcome resistance to change Typical benchmarking steps Decide what to benchmark Plan the benchmark project Understand your own performance Study others Learn from the data Take action © Cambridge Business Publishers, 2018