© 2012 jones et al: strategic managerial accounting: hospitality, tourism & events applications...

© 2012 Jones et al: Strategic Managerial Accounting: Hospitality, Tourism & Events Applications 6thedition, Goodfellow Publishers

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; Consider pricing from a financial, economic and

market perspective; and Reflect on the specific issues within hospitality,

tourism and events sectors.


Pricing approaches

Financial

Economic

Market


Financial approach to pricing

Costs + Mark-up = Selling Price



Difference between mark-up and gross profit



Price discretion varies with proportion of fixed costs


Cost-plus v. contribution margin pricing

Cost-plus pricing Contribution margin pricing

Arguments for

Forms a logical basis to recover total costs;

Simple to understand and safe to use;

It provides a ‘fair’ profit; and

It encourages price stability, whereas constant short-term price changes may prejudice long-term objectives.

It allows scope over the pricing decision between a floor and ceiling price;

It maximises contribution where price is elastic; and

Marginal costs are said to more accurately reflect the future.


Cost-plus v. contribution margin pricing (2)

Cost-plus pricing Contribution margin pricing

Criticisms against

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.

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.


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


Economists view of pricing


Market based approaches to pricing

Penetration pricing

Price skimming

Loss leaders

Psychological pricing

Competitor based pricing

Flash sales


Market based approaches to pricing


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.

© 2012 jones et al: strategic managerial accounting: hospitality, tourism & events applications...

Documents

pricing costs

price slide

tourism events applications

pricing price discretion

jones et

pricing decisions slide

pricing difference

pricing flash sales