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Which of the following are considered pricing strategies? (Select all that apply)
Variable pricing means that prices remain constant.
False
What is absorption target pricing?
Setting price to cover variable costs, absorb some fixed costs, and add a markup for desired profit.
Absorption target price is calculated as VC + FC + ____.
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What is price differentiation?
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When should a company consider using marginal cost pricing?
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What can trigger variable pricing?
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The formula for absorption target pricing is VC + FC + _____.
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Which of these is a potential disadvantage of absorption target pricing?
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Study Notes
Variable Pricing
- Lower prices when there is an urgency to offload inventory, such as when products are nearing their expiration date or are going out of fashion.
- Increase prices when demand is high or supply is low.
- Example: Lower the price of oranges that are nearing their expiration date.
Price Differentiation
- Different prices for different markets.
- Examples: Charging more in one region than another, charging more to consumers than businesses, or offering discounts to students or seniors.
- Price differentiation aims to maximize revenue but requires meeting specific conditions: customers must be unaware or unconcerned about higher prices in certain markets, and barriers like tariffs or laws must prevent consumers or competitors from purchasing products in the cheaper market.
Absorption Target Pricing
- Prices are set to cover variable costs, absorb a portion of fixed costs, and generate a desired profit margin based on projected sales.
- Formula: Absorption Target Price = VC + FC + NP
- Example: A business selling 100 chairs next month, each costing $20 to produce.
- Fixed costs are $1000, the target net profit is $3400.
- Absorption target price is calculated: $20 (VC) + $10 (FC) + $34 (NP) = $64 per chair.
- Advantages: It is accepted by customers and helps achieve profit targets if sales estimates are accurate.
- Disadvantages: It does not consider competitors' actions, relies heavily on accurate sales estimations, and may be less effective when costs are high.
Marginal Cost Pricing
- A short-term strategy where the price is set based on the cost of producing one additional unit.
- Marginal cost pricing is typically used in two situations:
- When a company has unused production capacity that is either used or wasted, like empty seats on an airplane; the price is reduced to near the variable unit cost.
- When the cost of providing an additional unit is expensive, as in the case of last-minute orders, the price is increased.
- Examples:
- Lowering prices of perishable items, such as oranges nearing their expiration date.
- Increasing prices on last-minute orders due to increased production costs.
- Filling empty seats on an airplane by reducing prices.
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Description
This quiz covers various pricing strategies including variable pricing, price differentiation, and absorption target pricing. Understand how businesses adjust prices based on inventory urgency, market differences, and cost coverage. Test your knowledge on these key concepts in pricing strategies.
