Pricing and Price Decision-Making

Syllabus

Thematic definition of lectures: 1. An introduction to pricing and pricing decisions. Price as an essential part of managerial decision making. The role of prices and the importance of pricing decisions for the firm. Defining price. Law on prices No.18/1996 Coll. Market and market system. Functions of price - allocative and informative. Market interpretation of price. Price as part of the marketing mix. Price as purchasing information. Price as a marketing incentive. Consumer interpretation of price. Effective price management - part of the firm's pricing decision-making. 2. Pricing policy and pricing decisions of the firm. The impact of the market environment and its changes on pricing decisions. The search for a balance between customer satisfaction and the firm's financial objectives and their impact on pricing decisions. The firm's strategic options in pricing. Critical factors in the firm's pricing decision - customer target groups, competitive dynamics, corporate objectives. The concept of leverage. Calculation of selling price in relation to corporate objectives. Risk in pricing decisions. 3. Prices and markets of perfect and imperfect competition. Demand, demand curve, law of demand and its assumptions, substitution, and income effect. Demand function, linear and non-linear. Factors influencing demand for goods (income, prices of related goods, advertising and consumer preferences, population size and structure, consumer expectations) and other factors. Supply, supply curve, supply law. Supply function, linear and non-linear. Factors affecting the supply of goods. Market equilibrium. Market price and market quantity. Law-fixed prices. Price ceilings and price floors. 4. Economic principles of price theory. Prices from the perspective of economic theory. Elasticity analysis. Effect of price changes on the level of demand. Elasticity of demand. Intrinsic price elasticity of demand. Perfectly elastic demand. Perfectly inelastic demand. Sales test. Effect of price change on the evolution of sales as a function of price elasticity properties. Cross price elasticity of demand. Substitute and complementary goods. Pension elasticity of demand. Normal and inferior goods. Other types of elasticities. Use of elasticities in managerial pricing decisions. 5. Pricing based on demand and competitive analysis. Consumer and product. Marginal utility and the concept of consumer preferences. The customer and buyer behavior. Options for assessing the intensity of demand for a product. Determination of the appropriate price. Methods of demand estimation- estimation by sales/sales managers, estimation by experts, estimation based on analysis of historical data, based on buyer survey, based on the value of functional performance of the product, estimation through test sales, based on laboratory experiments and using social networks. Competition-based pricing. Product pricing. Using the Target costing approach to pricing. 6. Cost-based pricing. The nature of cost, profit, and break-even point analysis. Meaning of costs, focusing on the criterion of division according to the relation to the volume of production into variable and fixed costs (overheads), analysis of total costs in relation to costing, analysis of profit in relation to corporate objectives and profit margins (maximum, minimum, optimum). Pricing methods based on full (total) cost, using profit and price markup and using return on invested capital (ROI), incomplete cost using contribution profit. Advantages and disadvantages of cost-based pricing. 7. Pricing based on consumer perception of value. Interpretation of consumer perceived value, clarification of the economic substance of consumer perceived value, value-based market segmentation and analysis of the customer in terms of perceived value. The importance of cost and competition in pricing based on consumer perception of product value. The process of the firm's steps that need to be clarified when moving to this type of pricing. The role of the price level in the firm's corporate strategy and its importance in value-based pricing. Innovation of the customer value perception process. 8. Pricing in commercial enterprises with respect to logistics and distribution channels. Basic factors influencing pricing in business enterprises, (acquisition/purchase price of goods, so-called cost of goods, choice of supplier, trade costs, contractual supplier-subscriber terms, level of profit, discounts, rebates). Factor analysis and price calculation using profit and price premium. Structure of the selling price in commercial enterprises based on the commercial and price margin, net price formation system using the profit premium, gross price formation system using the price premium. Logistics costs and their reflection in the price of goods. 9. Pricing of selected services. Basic pricing approaches in services. Basic characteristics and definition of different types of services for the type of pricing used. Cost-oriented pricing in services using a profit premium, using demand intensity, capacity-oriented pricing, utility-oriented pricing, modular-package pricing, relationship-based pricing. Pricing in transport services and pricing in tourism, with a focus on the factors that influence it and the potential impact of risk factors and random events on pricing in these areas. 10. The use of ABP (Activity based pricing) method in pricing of the company. The essence of the ABP (Activity based pricing) method. Principles and procedures of ABP pricing. The use of demand analysis, marketing information on market and customer requirements and the ABC (Activity based costing) method, which is used to determine the amount of overhead costs for the activities carried out in the enterprise. The meaning of the term - cost object, which can be a product (product or service), but also a customer and the relationship of costs to individual cost objects. Influence of individual factors influencing the ABP (Activity Based Pricing) method, its principles and objectives, creation of a basic model of pricing by the ABP method. 11. Geographically oriented pricing. Pricing in not-for-profit business and in the trades. Pricing in relation to the location of the contracting parties - the supplier and the customer - and the specificities that affect it due to the geographical scope of the market. Differences in geographical demand and costs, requirements of different market segments, order size, frequency of deliveries, guarantees, contractual services provided regarding INCORERMS international terms and conditions. The importance of transport costs in geographically oriented pricing. Approaches and practices in pricing in foreign markets. 12. Firm pricing strategies and product life cycle. The essence of pricing strategies. Pricing strategies - the basis for effective pricing decisions. Formation and development of pricing strategies. Types of pricing strategies. Skimming pricing. Penetration pricing. Prestige pricing. Expansionistic pricing. Extinction pricing. Product life cycle phases and pricing strategies. Pricing over the product life cycle. New product pricing. Use of leverage in pricing strategies. Proactive pricing. 13. Price regulation and other pricing practices. Price regulation. Principles and practices used in price regulation. Models of price regulation. State options in regulating monopoly pricing. Regulation of the rate of return on investment. Firms regulated according to the principle of regulating the rate of return on capital employed. Price regulation in Slovak conditions. Law on regulation in network industries. Price discrimination and other pricing practices. Transfer valuation. Price bundling. Competition and antitrust policy and its impact on prices. Thematic definition of exercises: 1. Informing students of the conditions for the award of continuous assessment. The division of the seminar papers according to headings, which differ in the degree of difficulty of preparation. (Topic 1: Basic issues in price theory, Topic 2: Business and prices, Topic 3: Practical application of price theory in a market economy.) To clarify the basic theoretical apparatus using inter-subject relationships (microeconomics, marketing, cost controlling, etc.) with a focus on external and internal factors influencing pricing: the relationship between price, cost, and profit. 2. Calculation of the minimum and base selling price with respect to corporate objectives. Risk in pricing decisions, analysis of factors affecting price risk - methods focused on the impact of price changes on the firm's performance (total gross profit). Calculation of price risk indicators (minimum sales volume, maximum sales decline), leverage (DOL) as an indicator that clarifies the possibility - necessity of investment in automation, sensitivity analysis. Examples are focused on mathematical calculations with emphasis on economic interpretation and suggestions for elimination of price risk of the company. 3. Relationship of categories affecting price: variable costs, fixed costs and total costs, volume of production, amount of projected profit. Analysis of the tipping point (critical point), its different variations of calculation according to the type of enterprise, the use of production capacity in the analysis of the tipping point, the limits of variable and fixed costs. Examples and case studies are focused on the calculations of the given indicators with a focus on the possibilities of reducing (optimizing) variable and fixed costs with an impact on the price level. 4. Basic issues of price theory. Pricing legislation in Slovakia. Utility theory - its importance for price formation. Price elasticity of supply and demand, its importance in price decision making. Market-consumer interpretation of price. Development and current state of the price level in Slovakia. Competition and its impact on prices. The Office for Regulation of Network Industries, tasks, and functions. Tax and levy policy of the state - labor price - current changes. Prices as an instrument of macroeconomic policy of the State (impact on revenues and expenditures of the State budget). State antitrust policy and its impact on prices. Presentations of seminar papers from the 1st strand. 5. Analysis of elasticities in pricing decisions and pricing. The essence of the relationship - to calculate elasticity (own and cross elasticity, clarification of calculations of elasticity coefficients for demand and supply, for different types of goods - substitution, complementary, interpretation of elasticity coefficients. Relationship between price and marginal revenue. Examples and case studies focus on the calculations and economic interpretation of the relationship between changes in quantity and price, as well as the reasons that lead a firm to make such changes. 6. Business and prices. Pricing strategies, their essence, and their application in business practice. The impact of VAT on prices and business in different sectors of the economy (production, trade, services). Price regulation in network industries. Customer perception of price and factors influencing purchasing behavior and purchasing decisions. Network industries and the consequences of price regulation of their products on the economic sphere - gas, electricity, heat, water. Price regulation, state intervention in prices in selected sectors (rail transport - passenger, freight, pharmaceutical industry). Assessment of the quality of the competitive environment in Slovakia in comparison with abroad. Presentations of seminar papers from the 2nd area. 7. Cost-based pricing in the enterprise - using profit markup, price premium and return on capital. Impact of other factors affecting pricing in a manufacturing enterprise: cost profitability, return on revenue as well as return on capital employed, VAT rate, gross and net profit, corporate tax rate, rate of levy on the reserve fund. ABC (Activity Based Costing) method - a procedure for budgeting overhead costs for activities. Examples and case studies are aimed at calculating the selling price considering the above factors for homogeneous and diversified production. 8. Pricing in trade: factors influencing pricing in wholesale and retail trade. The essence of the method of price calculations through the net price system, which is based on the purchase price (cost of goods), and the gross price system, which is based on the selling price, clarification of the relationship between profit and price markup (trade margin), as well as the trade cost rate in the pricing of commercial enterprises. Pricing in selected services - transport and tourism, with a focus on cost-based pricing and the use of demand intensity. Examples and case studies focus on the calculation of prices of goods in commercial enterprises, in services (e.g., rates per kilometer), pricing considering seasonality and the possibility of providing discounts. 9. Pricing in the trade business: factors influencing price level. Importance of factors influencing the price level (except profit) - material costs, cost of goods, transport costs, operating costs, social and health insurance contributions, personal income tax rate. The examples focus on the calculation of the hourly rate, which is affected by the operating costs and the effective working time of the entrepreneur in different types of trade business, followed by an analysis of the efficiency of the business (determination of the turning point - calculation of the minimum price in relation to the coverage of total costs, including levies) related to the operation of the trade. 10. Practical application of price theory in a market economy. The project of creating a pricing strategy of a particular enterprise. Application of pricing based on costs, demand and competition. Pricing of comparable products and pricing of a new product. Logistics and its impact on pricing. Pricing in services (restaurants, tourism, transport...). Pricing in commercial enterprises (regarding to wholesale and retail). Impact of macroeconomic indicators on prices in a particular enterprise (taxes, inflation - reflection in rental contracts). Pricing in trading on foreign markets (tariffs, national customs policy). Pricing in a trade business - selected aspects of a specific business. Presentations of seminar papers from the 3rd area. 11. Pricing over the product life cycle. Analysis of the factors influencing the price level at different stages of the product life cycle. The impact of innovation on prices over the life cycle. Pricing methods and their possible applications regarding the different phases of the life cycle. Demand analysis and its impact on pricing at different stages of the life cycle. Examples and case studies focus on the calculation of price with respect to the life cycle phase of a product in different types of enterprises and industries. Intermediate test. 12. Pricing in selected non-profit organisations regarding their financial management. The essence of financing a selected non-profit organization. The importance of funding sources as well as the possibilities of their use. Formation of the revenue and expenditure part of the budget of the selected non-profit organisation. Examples and case studies are focused on the pricing of the selected product - partly financed from external sources (e.g., budget, municipal contribution), partly from internal sources. 13. Pricing considering the location of the customer with respect to transport costs. Analysis of factors influencing pricing in a geographically distant market. Specifics of pricing in foreign markets. Methods and pricing practices in a foreign market. Examples and case studies focus on pricing practices regarding the possibility of including transport costs in the price, e.g., using average transport costs. Final evaluation.