PRICING DECISIONS
(MBG24201T– Management Accounting)
An Innovative Assignment submitted to
SRM Institute of Science and Technology
in partial fulfillment of the requirements for the award of the Degree of
MASTER OF BUSINESS ADMINISTRATION
Submitted by
P. DEVANATHAN
(Reg. No.RA2452001020034)
Under the Guidance of
[Link], Assistant Professor
Assistant Professor
Faculty of Management
Faculty of Management
SRM Institute of Science and Technology
Chennai – 89
Jan - April, 2025
INTRODUCTION
The term "price" can have different meanings depending on the context, but in business, pricing is a
crucial managerial decision for all types of companies—whether manufacturing, service-based, or
merchandising. According to Hilton and Platt (2011), manufacturing firms set prices for the products
they produce, merchandising firms for the goods they sell, and service firms for the services they
offer. Corr (1974) noted that pricing decisions—typically made for a short period, often up to one
year—are essential in business operations.
In today’s competitive market, accurate information is critical for survival. As stated by Sunarni
(2014), one of the key informational needs is management accounting data. The primary role of
management accounting is to support management by collecting, processing, and communicating
information, particularly for decision-making such as pricing.
From a managerial accounting perspective, pricing decisions fall into two categories: short-run and
long-run decisions. Prices often need adjustment due to inflation or changes in the costs of economic
resources. Price setting is among the most vital managerial decisions, as it directly influences
revenue. If a product is priced too low, sales might increase, but the company could fail to cover its
costs. Conversely, if the price is too high, sales may fall as customers turn to competitors (Horngren,
2012). As Claret and Phadke (1995) noted, price (in connection with volume) is the only factor that
directly generates revenue, while all others contribute to costs. Despite the rising significance of non-
price factors in competition, pricing remains central.
Pricing decision-making is the process of setting a product's price, which is distinct from a pricing
policy. Corr (1974) explained that pricing policies reflect management’s long-term approach toward
pricing, aimed at maximizing profit while aligning with corporate objectives. In the long run, prices
must cover all costs and deliver satisfactory profits for sustainability and competitiveness. In the
short run, prices should at least cover incremental costs.
Economic theory suggests that pricing should consider market structures (e.g., competition,
monopoly, oligopoly), demand and supply, and cost functions (Cunningham and Hornby, 1993).
However, applying this theory is often impractical due to the difficulty in identifying precise market
conditions. In contrast, the managerial accounting perspective focuses on practical approaches—
primarily ensuring that prices cover costs and yield acceptable profits.
The aim of this research is to explore pricing decisions, not pricing policies, from a management
accounting perspective in both small/medium and large enterprises, particularly emphasizing the
role of cost product information. Warshasky and Cahill (1996) suggested that larger firms, with
access to broader advertising channels like television, can enhance consumer perception and often
enjoy a cost advantage, allowing them to charge higher prices and take bolder pricing decisions. On
the other hand, Guilding, Drury, and Tayles (2005) pointed out that smaller firms, especially those in
markets dominated by large players, may have little influence over prices. For such firms, cost
information becomes a primary determinant in setting prices.
Houge (1971), as cited in Cunningham and Hornby (1993), argued that competition heavily
influences pricing in small firms, and while their pricing mechanisms may be easier to describe, they
tend to be less flexible compared to those of larger firms. Moreover, companies that export their
products operate in more competitive markets than those selling domestically, which makes market
factors more influential than cost-based pricing in such contexts.
Thus, this study also aims to examine how pricing objectives, influencing factors, and the role of cost
information differ between exporting and non-exporting firms. Ultimately, the core purpose is to
understand the key factors considered by medium and large-scale manufacturing firms in their
pricing decisions.
Cost-Driven Pricing: Cost-Based Pricing
Price represents the revenue earned per unit by a company. For a firm to remain viable, the product’s
price must exceed its cost. From a managerial accounting perspective, pricing decisions are often
based on product cost information. According to Hilton and Platt (2011), product cost plays a
crucial role in pricing for the following reasons:
⚫ There is often not enough time to perform detailed demand and marginal cost analysis for every
product or service.
⚫ While market conditions may eventually determine the final price, a cost-based pricing formula
provides managers with a logical starting point.
⚫ Product cost serves as a pricing floor, below which prices cannot fall in the long term.
In this sense, cost-based pricing reflects the minimum price at which a product can be sustainably
offered.
One of the most common forms of this method is cost-plus pricing. This involves calculating the
cost of production, adding a profit margin, and setting the final price. The effectiveness of this
method depends heavily on accurate cost calculation and a thorough understanding of the company’s
cost structure. As Mowen, Hansen, and Heitger (2012) noted, misinterpreting cost structure can
result in:
⚫ Overpricing, leading to lost sales due to more competitive alternatives.
⚫ Underpricing, failing to cover costs, thus reducing profitability or incurring losses.
The main advantage of cost-based pricing is its simplicity. It does not require information on
market demand, competition, or customer behavior. However, this simplicity is also its greatest
weakness.
As outlined by Fletcher and Russel-Jones (1997), and Nessim and Dodge (1995) (as cited in Korda
and Belogavec, 2004), the drawbacks of cost-based pricing include:
⚫ Uncertainty in cost estimation: Different costing methods can yield widely different results.
⚫ Lack of demand sensitivity: If actual demand falls short, expected returns may not be realized.
⚫ Customer misalignment: Prices may not match what customers are willing to pay, resulting in
poor market fit.
Despite its limitations, cost-based pricing remains widely used. However, as noted by
Diamantopoulos and Mathews (1995, cited in Korda & Belogavec, 2004), recent years have seen a
shift toward more market-oriented approaches.
Cost-based pricing method is also not fair for customer because if a company produce their product
inefficiently, the customer has to pay the un-efficiency impact on costs. This approach also does not
consider demand, supply, competition and new entrance.
Market Driven Pricing: Value-Based Pricing
Market-driven or market-based pricing focuses on consumer demand and competition. This approach
assumes that a product’s price should reflect its perceived value and brand image. Pricing is
determined from the customer’s perspective—companies assess how much a consumer is willing to
pay based on their perception of the product’s value.
Amir (2016) emphasized that pricing should be based on customer value rather than solely on
production costs or competitor prices. According to this approach, a price is considered fair when it
aligns with the customer’s expected outcomes from the transaction.
While market-based pricing relies heavily on supply and demand dynamics, companies must strike a
balance—they should avoid setting prices too low, which could result in losses, or too high, which
could drive customers to competitors. Despite its market orientation, an accurate product costing
method remains essential, as it determines the minimum viable price (Kain and Rosenzweig, 1992).
In this pricing model, prices are essentially negotiated or agreed upon based on mutual understanding
between buyers and sellers. Korda and Belogavec (2004) outline the steps involved in market-based
pricing, as shown in Figure 2.
Economics assumes that consumers are rational decision-makers with access to perfect information.
Therefore, if the price of a product increases and the consumer is fully informed, demand typically
decreases. Conversely, if the price decreases, demand increases—resulting in a downward-sloping
demand curve.
Organization-Controlled Factors in Pricing
Even in highly competitive markets, some pricing factors remain within the control of the
organization. Two significant aspects that organizations can manage are the Product Life Cycle and
the Product Portfolio.
Product Life Cycle
As discussed in Chapter 8, "Product and Service Decisions," the stage of the product life cycle can
significantly influence pricing strategy (see Fig. 10.2).
⚫ Introduction Stage: During this phase, the price may be set high to capitalize on the product’s
uniqueness, a strategy known as price skimming. Examples include the early video recorders or
the first iPhone. Skimming helps to recover development costs and project a premium image.
⚫ Growth and Maturity Stages: Over time, organizations might reduce prices to maximize
market penetration and gain a broader customer base.
⚫ Saturation and Decline Stages: As the product reaches market saturation, price competition
tends to intensify. Eventually, as the product enters decline, prices might rise again to "milk"
the remaining demand before phasing it out.
This theory assumes that the product has a unique life cycle separate from the overall market, which
occurs if the organization develops a niche segment.
For nonprofit services, the product life cycle is equally relevant. The perceived value of the service
evolves over time, and service providers must adapt pricing and communication strategies
accordingly. Managing the service portfolio helps maintain relevance and meet a broad range of
public needs. For instance, a national health service must balance the provision of traditional
treatments with the introduction of modern, innovative offerings.
Product Portfolio Strategy
If an organization offers multiple products, it can apply different pricing strategies across its
portfolio to optimize overall profitability. This may involve:
⚫ Using profitable products to subsidize others.
⚫ Pricing newer products competitively to attract customers.
⚫ Increasing the price of underperforming products (referred to as "milking") to recover
investments if they fail to become market leaders.
In this way, portfolio management enables organizations to balance short-term profitability with
long-term growth while maintaining a diverse product or service offering that caters to various
consumer segments.
Pricing Strategy: Portfolio Management, Product Line Dynamics, and Brand Positioning
Portfolio Pricing Strategy
Organizations with multiple product lines may operate similar brands with distinct pricing
strategies to serve different market segments. For example, Toyota offers Lexus at a premium price
targeting the luxury segment, while Camry and Corolla cater to price-sensitive customers at more
affordable price points. Similarly, General Motors employs a wide-ranging brand portfolio, from
Cadillac (high-end) to Chevrolet (mass-market), enabling pricing flexibility across consumer tiers.
This portfolio approach offers a strategic advantage by “underwriting” higher-price policies
through brand differentiation. Riskier pricing experiments with premium models are buffered by
the revenue security of lower-priced offerings. While effective, this strategy is only viable for firms
with significant financial resources and market presence.
Product Line Pricing
Pricing decisions often have interdependencies across products within a company’s lineup. These
interrelations can manifest through:
Interrelated Demand:
⚫ Products may be complementary, like computers and their software, where a price increase in
one affects demand for both.
⚫ Products may also be substitutes, such as various detergent brands by Procter & Gamble, where
a price shift in one can lead consumers to switch to another.
Interrelated Costs:
⚫ Products might share production facilities or processes. For instance, multiple car models might
be produced on the same assembly line.
⚫ In some industries, outputs are by-products of a single process (e.g., gasoline and heating oil
from crude oil). Adjusting the pricing or production of one can influence the costs and pricing of
others.
Because of these complexities, product line pricing requires careful judgment and strategic
foresight.
Segmentation and Product Positioning
One of the most effective ways to maintain higher prices is through strategic market segmentation
and positioning. By crafting a distinct market niche, companies can insulate themselves from
intense price competition. Brands like Apple have successfully employed this approach, avoiding the
price wars that dominate much of the PC market by creating a loyal customer base focused on brand
experience and perceived value.
As explored in Chapter 7, segmentation allows firms to target specific consumer groups more
effectively, giving them greater pricing control. When price competition becomes intense, revisiting
segmentation strategies can often alleviate pressure and preserve margins.
Creating a Brand “Monopoly”
In contrast to the economic theory of perfect competition—where price is the primary factor—
marketers aim to create a brand monopoly, where consumer preference overrides price sensitivity.
The goal is for the consumer to seek out a specific brand (e.g., Heinz Baked Beans) rather than a
generic product type.
In industrial markets, this concept manifests through preferred vendor lists, where certain
suppliers are routinely selected while others are excluded. These preferences often stem from
organizational inertia or efforts to reduce perceived risk. A classic example of this mindset is
reflected in the famous corporate adage:
“No one ever got fired for buying IBM.”
Pricing Strategies and Factors
Market-Driven Pricing:
⚫ Focuses on customer demand and competition.
⚫ Price is set based on perceived value and customer expectations.
⚫ Skimming (high initial price) vs. penetration pricing (low price to increase market share).
Organization-Controlled Factors:
⚫ Product Life Cycle: Price changes based on the product's stage (introduction, growth, maturity,
decline).
⚫ Product Portfolio: Companies can manage different product brands with varying prices to
target different segments.
⚫ Product Line Pricing: Prices can be interrelated across products, impacting demand and costs.
Customer Factors:
⚫ Customer Demand: Fluctuates with supply, affecting price (e.g., seasonal prices).
⚫ Customer Benefits and Value: Price correlates with perceived benefits and value in the
consumer's eyes.
⚫ Distribution Channel: Intermediaries may affect final price through their own pricing strategies.
Market Factors:
⚫ Competition: Price decisions often depend on what competitors charge.
⚫ Economic and Regulatory Environment: Economic conditions (e.g., recession) and
regulations (e.g., price controls) influence pricing.
⚫ Exchange Rates: Currency fluctuations can impact prices of imported/exported goods.
Geographical Pricing:
Pricing strategies vary based on regional factors like delivery
Pricing New Products Overview:
When launching a new product, an organization is often most flexible with determining the price.
However, once the price is set, it becomes a reference point for future price changes. Consumers tend
to compare the current price with the initial price, and substantial changes could lead to negative
reactions, as they might feel the company is exploiting them.
Pricing in Existing Markets: For new products entering an existing market, price is just one of the
positioning elements. Companies must carefully determine the price to align with the desired market
positioning. In simpler terms, the producer must decide if the new product will fall into the "cheap"
or "expensive" category, often by comparing it to similar products already available. In industrial
markets, price comparison can be more challenging, especially when discounts are negotiated
beyond the listed price.
Pricing a Totally New Product: For a completely new product or service, pricing is more difficult
as there are no established precedents for consumer behavior. In this case, pricing is largely based on
judgment and an estimate of the "perceived value" that consumers will place on the product. Market
research may not be very accurate in predicting this value.
Manager’s Corner: Exchange Rates and Pricing Strategy
Foreign exchange rates significantly impact pricing strategies, particularly for companies operating
internationally. For example, when the dollar appreciated against the yen and the German mark in
the 1980s, Japanese cars were more affordable in the U.S. compared to European cars. However,
when the dollar depreciated against these currencies in the 1990s, Japanese automakers raised prices
less aggressively, which helped them retain their U.S. market share better than their German
competitors.
Japanese companies, like Toyota, often set their pricing strategies based on unfavorable exchange
rates to protect against currency fluctuations. This strategy allowed them to maintain competitive
pricing in foreign markets, despite a stronger yen.
Alternative Pricing Strategies for New Products
Two main pricing strategies are often considered for new products: skimming pricing and
penetration pricing.
Skimming Pricing:
⚫ Definition: This strategy involves setting an initial high price to maximize profits, especially
when there are no immediate competitors. It is common in markets with limited competition or
innovative products, such as new technology.
⚫ Example: Early mobile phones were priced high when they first entered the market, targeting
wealthier customers. Over time, prices dropped as demand grew and competition emerged.
⚫ Advantages: Maximizes initial profits, creates a premium image, and recoups development
costs quickly.
⚫ Disadvantages: High prices may encourage competitors to enter the market sooner, and price
reductions may be required as competition increases.
Penetration Pricing:
⚫ Definition: This strategy sets an initial low price to quickly gain market share, discourage
competitors, and build customer loyalty. It's often used by companies entering existing markets
or launching expensive technology.
⚫ Example: Japanese companies often entered markets with lower prices, increasing volume and
reducing costs through economies of scale.
⚫ Advantages: Accelerates market share growth, attracts customers, and establishes brand
presence.
⚫ Disadvantages: Loss of potential high-profit margins and possible market saturation in the early
stages.
Specific Policies Under Penetration Pricing:
⚫ Maximizing brand/product share: Focuses on growing market share in new markets.
⚫ Maximizing current revenue: Assumes higher sales lead to higher profits, though this is not
always the case.
⚫ Survival: For some companies, aggressive pricing is a survival strategy to outlast competitors or
difficult market conditions.
Both skimming and penetration pricing strategies have their pros and cons, and the choice depends
on factors such as market conditions, competition, product uniqueness, and long-term business goals.
costs (e.g., zone pricing, uniform pricing).
Practical Pricing Policies
Practical pricing policies often rely on simplified "rules of thumb" rather than sophisticated pricing
theories. Key pricing strategies include:
Cost-Plus Pricing: Pricing based on the product's cost plus a profit margin. While common,
it can reward inefficiency and ignore market demand. It is sometimes used in long-term
partnerships, like with governments.
Target Pricing: Aiming for a reasonable return on investment (ROI), considering both
variable and fixed costs. However, this can lead to frequent price increases, which might
reduce customer base, as seen with General Motors in the 1980s.
Historical Pricing: Adjusting current prices based on previous prices and inflation. This
approach must also account for market changes.
Product Line Pricing: Prices within a product line are set relative to each other. A common
example is "price lining," where predetermined price points are used.
Competitive Pricing: Setting prices based on competitors' prices, which can lead to price
wars. It's critical to understand the customer and competitor dynamics to set optimal pricing.
Market-Based Pricing: Setting prices according to what customers perceive as valuable,
often used for luxury items. However, determining perceived value can be challenging.
Selective Pricing Strategies:
1. Category Pricing: Offering different price ranges for the same product.
2. Customer Group Pricing: Different prices for various customer groups, like student or senior
discounts.
3. Peak Pricing: Higher prices during high-demand times and lower prices during off-peak times.
4. Yield Pricing: Prices are adjusted based on demand fluctuations, like in airlines or theaters.
5. Service-Level Pricing: Prices vary depending on the level of service offered, such as premium
seating or faster delivery.
his section outlines various types of discounts and pricing strategies that businesses use to drive sales,
attract different customer segments, and respond to market conditions. Here's a summary of the
discount types mentioned:
Discount
◆ Trade Discounts: Offered to members of the distribution channel (like retailers or wholesalers)
for their services in distributing the product.
◆ Quantity Discounts: Given to customers who buy larger quantities, often through bulk
packaging, such as "30% extra free" offers. This encourages larger purchases without lowering
the unit price.
◆ Cash Discounts: Incentives for customers who pay in cash or settle their bills promptly, aimed
at encouraging quicker payments.
◆ Allowances: Typically offered as trade-ins for old products, such as in electronics or
automobiles, to persuade customers to upgrade to newer products.
◆ Seasonal Discounts: Used in markets with seasonal demand fluctuations, where higher prices
are charged during peak demand periods and lower prices are offered off-season.
◆ Promotional Pricing: A temporary price reduction used as part of a sales promotion to attract
customers and boost sales in the short term.
◆ Individual Pricing: Custom prices negotiated directly with customers, often seen in certain
regions or industries like Latin America and Southeast Asia, or in industrial B2B sales.
◆ Optional Features: Instead of discounts, customers can be offered a basic product and then add
optional features at an additional cost, often with higher profit margins.
◆ Product Bundling: Related products are sold together at a discounted price compared to
purchasing each item individually. This is common in industries like tourism and hospitality.
◆ Value Package: A type of bundled offer where customers receive a product that includes certain
accessories, often seen in the automotive industry.
◆ Psychological Pricing: High initial prices are set with significant discounts to create the illusion
of a bargain, though this tactic can backfire if perceived as misleading and may be regulated.
challenge
Price Sensitivity:
◆ Customers' sensitivity to price can vary significantly. A small price increase can drive away
price-sensitive customers, while some customers may be willing to pay a premium for perceived
value. Understanding the right price point that balances affordability with profitability is
complex.
Competition:
◆ Pricing must often be competitive. If a business sets its price too high relative to competitors, it
might lose market share. On the other hand, pricing too low can lead to unsustainable margins
and may signal lower quality to consumers.
Cost Structure:
◆ Ensuring that the price covers costs, including production, marketing, distribution, and other
overheads, is a fundamental challenge. Companies must account for variable and fixed costs
while maintaining profit margins.
Market Segmentation:
◆ Different segments of the market may have different pricing expectations. For example, a luxury
product may command a higher price among high-income consumers, but a more competitive or
value-driven pricing strategy may be needed for price-sensitive customers. Tailoring pricing
strategies for different market segments adds complexity.
External Factors:
◆ Economic factors like inflation, exchange rates, and taxes can impact pricing decisions. For
instance, currency fluctuations might affect pricing in international markets, or new taxes can
affect the final price of products.
Legal and Regulatory Issues:
◆ Pricing strategies are sometimes subject to government regulations, such as price-fixing laws or
anti-competitive practices. Businesses need to ensure their pricing strategies are in compliance
with local, national, or international regulations.
Perceived Value:
◆ The price of a product isn't just determined by its cost but by the value it provides to the
consumer. Companies face the challenge of understanding and communicating this value to
justify the price.
Seasonality and Demand Fluctuations:
◆ Seasonal demand (such as holiday shopping) or cyclical changes (like weather affecting product
usage) can impact the ability to maintain consistent pricing. For example, a product that is in
high demand during certain months may need to be priced differently during off-peak seasons.
Psychological Pricing:
◆ Understanding how customers perceive prices is crucial. For instance, pricing something at
$9.99 rather than $10 can have a psychological impact. Balancing these subtle pricing strategies
with value perception can be difficult.
Technological Advancements:
◆ The pace of technological innovation can affect pricing. For example, as new technologies
emerge, the cost of manufacturing or producing goods can decrease, leading to pressure to lower
prices or offer new pricing models to stay competitive.
Global Pricing:
◆ For businesses operating internationally, pricing decisions must account for local market
conditions, competition, consumer behavior, and economic factors. Global pricing strategies
must balance uniformity and adaptability to cater to different regions.
Brand Positioning:
◆ A business's brand image affects how it can price its products. Luxury brands may set higher
prices to maintain their prestige, while brands positioning themselves as affordable or value-
driven may have less flexibility to increase prices.
Price Discrimination:
◆ While price discrimination (charging different prices to different customers based on their
willingness to pay) can maximize profits, it is difficult to implement effectively without
alienating certain customer groups. The challenge lies in ensuring fairness and avoiding backlash.
Dynamic Pricing:
◆ With the rise of digital platforms and data analytics, many businesses use dynamic pricing
(adjusting prices based on demand, time, customer behavior, etc.). While this can maximize
revenue, it also risks alienating customers if the pricing appears unfair or unpredictable.
Customer Expectations:
◆ In today's competitive landscape, customers have high expectations for value, quality, and
pricing transparency. Failing to meet these expectations can result in loss of loyalty or negative
reviews, further complicating the pricing strategy.