Transcript Chapter 6 - Goodfellow Publishers

Chapter 6
Pricing Decisions
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
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.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Pricing approaches
 Financial
 Economic
 Market
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Financial approach to
pricing
Costs + Mark-up = Selling Price
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Financial approach to
pricing
Difference between mark-up and gross profit
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Financial approach to
pricing
Price discretion varies with proportion of fixed costs
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Cost-plus v. contribution
margin pricing
Cost-plus pricing
Arguments
for

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Contribution margin
pricing
Forms a logical basis to
 It allows scope over the
recover total costs;
pricing decision between
Simple to understand and
a floor and ceiling price;
safe to use;
 It maximises contribution
It provides a ‘fair’ profit;
where price is elastic;
and
and
It encourages price
 Marginal costs are said to
stability, whereas constant
more accurately reflect
short-term price changes
the future.
may prejudice long-term
objectives.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Cost-plus v. contribution
margin pricing (2)
Criticisms
against
Cost-plus pricing
Contribution margin
pricing
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Ignores what customers are prepared
to pay, suggesting the ‘correct’ price
is costs plus assumed mark-up;
It involves circular reasoning – costs
depend on volume, but volume is
influenced by price;
Having multi-products/services
renders allocation of fixed costs
meaningless;
It ignores competitors prices, sales
will normally go to the lowest priced
provider if product/service is
comparable; and
It exaggerates the precision by which
costs may be allocated.

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Practical difficulties encountered
with establishing the demand
curve (setting price too high or
too low);
Difficulty in separating fixed and
variable costs;
Constant price changes could
affect stability; and
Competition could lead to low
margin returns, so fixed costs
are not covered.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
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
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Economists view of pricing
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Market based approaches to
pricing
 Penetration pricing
 Price skimming
 Loss leaders
 Psychological pricing
 Competitor based pricing
 Flash sales
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Market based approaches to
pricing
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers
Summary

Traditional accounting based approaches are cost based, ‘costplus’ 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.
© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers