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Chapter 6

Chapter 6. Pricing Decisions. Objectives. After studying this topic you should be able to : Understand the importance of the pricing decision and its impact on the business; Develop a working knowledge of pricing methods;

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Chapter 6

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  1. Chapter 6 Pricing Decisions

  2. Objectives After studying this topic you should be able to: Understand the importance of the pricing decision and its impact on the business; Develop a working knowledge of pricing methods; Consider pricing from a financial, economic and market perspective; and Reflect on the specific issues within hospitality, tourism and events sectors.

  3. Pricing approaches Financial Economic Market

  4. Financial approach to pricing Costs + Mark-up = Selling Price

  5. Financial approach to pricing Difference between mark-up and gross profit

  6. Financial approach to pricing Price discretion varies with proportion of fixed costs

  7. Cost-plus v. contribution margin pricing

  8. Cost-plus v. contribution margin pricing (2)

  9. Pricing using target costing A company wishes to generate a 65% contribution towards fixed costs and profit. Its selling price is set at £50 by the market. Selling price = £ 50 Contribution = £50*65% = £(32.50) Target variable costs = £50-£32.50 = £ 17.50

  10. Economists view of pricing

  11. Market based approaches to pricing Penetration pricing Price skimming Loss leaders Psychological pricing Competitor based pricing Flash sales

  12. Market based approaches to pricing

  13. Summary Traditional accounting based approaches are cost based, ‘cost-plus’ so add a ‘mark-up’ to cover profit and any costs not in the ‘cost base’. Contribution margin pricing is useful where there are high fixed costs, therefore a high level of price discretion. Target costing uses costs in a market orientated approach to pricing. The economists perspective is that one ‘best’ price can be established for optimising returns. Market based approaches consider what the market is prepared to pay for a product, this can vary with point in the product life cycle and market positioning of the product/service.

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