Cost and Economics in Pricing Strategy

Start Date: 08/16/2020

Course Type: Common Course

Course Link:

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About Course

How much should you charge for your products and services? Traditionally, businesses have answered this question based on the cost to produce or provide their goods and services. This course shows you the economic factors behind pricing based on cost and the pros and cons of a cost-based pricing approach. Led by Darden faculty and Boston Consulting Group global pricing experts, the course provides the practical and research-based models and methods you need to set prices that maximize your profits. By the end of this course, you’ll be able to: --Apply knowledge of basic economics to make better pricing decisions --Recognize opportunities for price discrimination—selling the same product at different prices to different buyers—and recommend strategies to maximize sales and profits --Calculate three types of price elasticities to determine the impact of price on demand --Analyze and apply different pricing models -Cost-plus pricing -Marginal cost-plus pricing -Peak-load pricing -Index-based pricing --Evaluate the impact of channel intermediaries and customer lifetime value on pricing

Course Syllabus

Welcome to the first week of Cost and Economics in Pricing Strategy course! We'll begin our study of pricing by looking at some basic economic principles relevant to pricing, such as cost and cost variations and what that implies about the supply curve. Then we'll take a closer look at one pricing mechanism: auctions. You will never look at eBay the same!

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Course Introduction

Cost and Economics in Pricing Strategy In this course, we learn the basic concepts of cost theory and how to price an investment. We cover pricing strategy, discounting strategy, and cash flow strategy. We also cover asset values and the discount rate. We wrap up by looking at the economics behind corporate decision-making and how these decisions impact investment decisions. Upon completion of this course, you will be able to: 1. Use basic concepts of cost theory to price an investment 2. Discount pricing and cash flow management 3. Corporate decision-making 4. Asset values 5. Capital budgeting 6. Investment strategy 7. Decision-making 8. Market analysis 9. Investment strategy 10. Decision-making 11. Investment strategy 12. Investment policy 13. Investment strategy 14. Asset values 15. Decision-making 16. Capital budgeting 17.

Course Tag

Cost-Based Pricing Channel and Direct-to-Consumer Pricing Pricing Strategies Price Discrimination Price Elasticity Of Demand

Related Wiki Topic

Article Example
Cost-plus pricing Cost-plus pricing is a pricing strategy in which the selling price is determined by adding a specific dollar amount markup to a product's unit cost. An alternative pricing method is value-based pricing.
Cost-plus pricing In product areas that feature relatively similar production costs, cost-plus pricing can offer competitive stability if all firms adopt cost-plus pricing.
Pricing Marketers develop an overall pricing strategy that is consistent with the organisation's mission and values. This pricing strategy typically becomes part of the company's overall long -term strategic plan. The strategy is designed to provide broad guidance to price-setters and ensures that the pricing strategy is consistent with other elements of the marketing plan. While the actual price of goods or services may vary in response to different conditions, the broad approach to pricing (i.e., the pricing strategy) remains a constant for the planning outlook period which is typically 3–5 years, but in some industries may be a longer period of 7–10 years.
Pricing "Premium pricing" (also called prestige pricing) is the strategy of consistently pricing at, or near, the high end of the possible price range to help attract status-conscious consumers. The high pricing of a premium product is used to enhance and reinforce a product's luxury image. Examples of companies which partake in premium pricing in the marketplace include Rolex and Bentley. As well as brand, product attributes such as eco-labelling and provenance (e.g. 'certified organic' and 'product of Australia') may add value for consumers and attract premium pricing. A component of such premiums may reflect the increased cost of production. People will buy a premium priced product because:
Pricing strategies Variable pricing strategy sums up the total cost of the variable characteristics associated in the production of the product. Examples of variable characteristics are: interest rates, location, date, and region of production. The sum total of the following characteristics is then included within the original price of the product during marketing. Variable pricing enables product prices to have a balance "between sales volume and income per unit sold". Variable pricing strategy has the advantage of ensuring the sum total of the cost businesses would face in order to develop a new product. However, variable pricing strategy excludes the cost of fixed pricing. Fixed pricing includes the price of dedication received from manufactures in the production of developing the product and other involvement of factors.
Affine pricing In economics, affine pricing is a situation where buying more than zero of a good gains a fixed benefit or cost, and each purchase after that gains a per-unit benefit or cost.
Cost-plus pricing Buyers may perceive that cost-plus pricing is a reasonable approach. In some cases, the markup is mutually agreed upon by buyer and seller.
Pricing strategies A retail pricing strategy where retail price is set at double the wholesale price. For example, if a cost of a product for a retailer is £100, then the sale price would be £200. In a competitive industry, it is often not recommended to use Keystone Pricing as a pricing strategy due to its relatively high profit margin and the fact that other variables need to be taken into account.
Pricing Broadly, there are six approaches to pricing strategy mentioned in the marketing literature:
Cost Benchmarking Cost Benchmarking is the measurement, refinement and analysis of ones Cost of Goods Sold (COGS) when compared to market peers. Cost Benchmarking identifies competitiveness of pricing in industry terms, highlighting best in class pricing and subsequently showing areas for competitive pricing improvement. Cost Benchmarking is a valuable tool for Supply Chain Managers when creating a negotiation strategy to drive down overall COGS. The objectives of Benchmarking are to determine what and where improvements are called for, to analyze how other organizations achieve their high performance levels, and to use this information to improve performance.
Cost-plus pricing Cost-plus pricing is especially common for utilities and single-buyer products that are manufactured to the buyer's specification such as military procurement.
Average cost pricing Average cost pricing forces monopolists to reduce price to where the firm's average total cost (ATC) intersects the market demand curve. The effect on the market would be:
Cost-plus pricing Cost-plus pricing is not common in markets that are (nearly) perfectly competitive, in which prices and output are driven to the point at which marginal cost equals marginal revenue. In the long run, marginal and average costs (as in cost-plus) tend to converge, reducing the difference between the two strategies. It works great when a business is in need of short-term finance.
Average cost pricing Average cost pricing is one of the ways the government regulates a monopoly market. Monopolists tend to produce less than the optimal quantity pushing the prices up. The government may use "average cost pricing" as a tool to regulate prices monopolists may charge.
Economics of Strategy Economics of Strategy is a textbook by David Besanko, David Dranove, Scott Schaefer, and Mark Shanley. The book offers a solid economic foundation for strategic analysis. The text was initially published in 1996 by John Wiley & Sons and, as of 2017, available in its seventh edition. "Economics of Strategy" is one of the leading books of its kind and has earned loyalty both as a classroom tool and as a professional reference book. The signature book covers feature famous impressionist paintings.
Cost-plus pricing Cost-plus pricing is often used on government contracts (cost-plus contracts), and was criticized for reducing pressure on suppliers to control direct costs, indirect costs and fixed costs whether related to the production and sale of the product or service or not.
Rational pricing Rational pricing is the assumption in financial economics that asset prices (and hence asset pricing models) will reflect the arbitrage-free price of the asset as any deviation from this price will be "arbitraged away". This assumption is useful in pricing fixed income securities, particularly bonds, and is fundamental to the pricing of derivative instruments.
Premium pricing The disadvantages of this pricing strategy includes:
Cost-plus pricing When business people choose the markup that they apply to costs when doing cost-plus pricing, they should be, and often are, considering the price elasticity of demand, whether consciously or not.
Cost Cost-plus pricing, is where the price equals cost plus a percentage of overhead or profit margin.