Pricing
Topic Gateway Series
Pricing
Topic Gateway Series No. 18
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Prepared by Liz Murby and Technical Information Service
Revised November 2008
Pricing
Topic Gateway Series
About Topic Gateways
Topic Gateways are intended as a refresher or introduction to topics of interest
to CIMA members. They include a basic definition, a brief overview and a fuller
explanation of practical application. Finally they signpost some further resources
for detailed understanding and research.
Topic Gateways are available electronically to CIMA members only in the CPD
Centre on the CIMA website, along with a number of electronic resources.
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Pricing
Topic Gateway Series
Definition
Pricing is defined as the:
‘Determination of a selling price of the product or service produced.’
CIMA Official Terminology, 2005
There are a number of different pricing methodologies and strategies which may
be used in pricing. The strategy chosen depends on the individual organisation
producing the product or service.
Context
In the current syllabus, CIMA students will learn and may be examined on this
topic in Paper 5, Integrated Management.
Related concepts
Transfer pricing refers to the pricing of goods and services within a
multi-divisional organisation. For example, goods from the production division
may be sold to the marketing division. Equally, goods from a parent company
may be sold to a foreign subsidiary.
Overview
The price of an offering is a key element of an organisation’s marketing mix. The
mix comprises price, product or service, place of distribution and promotion
factors. These factors communicate with potential customers and influence the
consumer’s perception of the offering.
In determining price, organisations should be aware of their mission and
objectives, together with costs and constraints.
Organisations may adopt one of several pricing strategies. These include cost-plus
pricing, discount pricing, penetration pricing, pre-emptive pricing, prestige
pricing, price skimming and target pricing. (See table in Application for further
details). The price, once set, should support the achievement of the
organisation’s mission.
The price(s) set and pricing practices may vary between markets, market
segments and geographical regions. They also vary over time, according to
customer wants and organisational objectives.
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Pricing
Topic Gateway Series
In the case of transfer pricing, the choice of price affects the division of total
profit among different parts of the company. It can be advantageous to choose
transfer prices so that, in book keeping terms, most of the profit is made in a low
tax country. However, most countries have tax laws and regulations that limit
how transfer prices can be set.
Application
In setting price, producers of goods and services need to take a number of
different issues into account. The key factors to consider include:
•
production costs (labour, materials, overheads)
•
distribution costs
•
marketing costs
•
competition pricing and activity
•
perceived value (by the customer)
•
government influence
•
trade requirements
•
volume targets (high price/low volume versus low price/high volume).
There are a number of tried and tested pricing strategies:
Penetration
pricing
Enter market with special offer pricing
to get market share quickly. This was
used by utilities entering deregulated
European markets.
Discount
pricing
Tactically reducing price occasionally
to steal competitor share.
Skim the
cream
Start with a high price to get the early
adopters and then gradually reduce.
This happens in technology markets
such as PCs and Hi-Fi.
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Pricing
Topic Gateway Series
Premium
pricing
Adopt a platform of high prices and
stick to it, for example, Rolex
watches.
Cost plus
pricing
Doesn’t work in a dynamic market
but sometimes used in government
contracts or controlled economies.
Going rate
Fitting the market price of
competitors with like-for-like
comparison.
Target pricing
Fixing price by market segments or
distribution channels.
Price
discrimination
For example, fixing a price too high
(or too low) to exclude certain
customers. For instance, some airport
customers will pay extra to park in the
short term or business car park while
others won’t.
Quantum
pricing
Fix price high and lowering until sales
occur. For instance, Amazon Internet
model.
Odd number
pricing
Psychologically, ending a price with a
nine makes it appear
disproportionately cheaper. For
example, £4.99 seems considerably
cheaper than £5.00.
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Pricing
Topic Gateway Series
In the supply chain, there is great flexibility in pricing if the customer is not the
end user. One example is the traditional retailer model where the seller can
discuss discounts, margins, buy-in incentives, promotions and offers to influence
stocking levels.
Pricing and the internet
For many organisations, the growing acceptance and implementation of B2B
commerce and web enabled trading has had a dramatic effect on pricing. The
length of the supply chain, from manufacturer to customer, via wholesalers and
retailers, has become shortened. Customers are now increasingly able to deal
directly with the manufacturer.
Both customers and potential competitors can benefit through increased price
transparency and comparability. This has come about through the use of search
engines and dedicated price comparison sites. Where there are low barriers to
market entry, the speed of price changes, including reductions, is likely to
increase.
The benefits of these changes are two-fold. Customers may gain from the
opportunity of direct price comparison. Suppliers have the opportunity to exploit
the benefits of increased market segmentation.
Further information
Articles
Full text for Business Source Corporate available through My CIMA
www.cimaglobal.com/mycima
[Accessed 11 November 2008]
Anderson, E. and Simester, D. Mind your pricing cues. Harvard Business Review,
September 2003, Volume 81, Issue 9, pp 96-103
Bidaud, H. Culture must drive a winning policy. International Tax Review, October
2006, Volume 17, Issue 9, pp 27-29
Brennan, R., Canning, L. and McDowell, R. Price-setting in business-to-business
markets. Marketing Review, Fall 2007, Volume 7, Issue 3, pp 207-234
Eyink, C., Marn, M. and Moss, S. Pricing in an inflationary. McKinsey Quarterly,
2008, Issue 4, pp 100-103
Hansen, F. Transfer pricing front and center. Business Finance, April 2006,
Volume 12, Issue 4, pp 49-53
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Pricing
Topic Gateway Series
Lawrence, B. Calculating pricing optimization. Industrial Distribution, August
2006, Volume 95, Issue 8, pp 26-27
Norton, C. and Burns, P. Transfer pricing for intangible development: costsharing alternatives. International Tax Review, December 2006, Intellectual
Property, pp 47-51
Pass, C. Transfer pricing in multinational companies. Management Accounting,
September 1994, Volume 72, Issue 8, pp 44-50
Robertson-Kellie, J. and Mahalingham, S. How transfer pricing strategy can
contribute to value leakage. International Tax Review, May 2006, Volume 17,
Issue 5, pp 51-52
Stamer, H. and Diller, H. Price segment stability in consumer goods categories.
Journal of Product and Brand Management, 2006, Volume 15, Issue 1, pp 62-72
Sodhi, M. and Sodhi, N. Six sigma pricing. Harvard Business Review, May 2005,
Volume 83, Issue 5, pp 135-142
Unwin, M. Transfer pricing documentation fails harmony test. International Tax
Review, July/August 2006, Volume 17, Issue 7, pp 37-40
Articles
Abstract only from Business Source Corporate through My CIMA
www.cimaglobal.com/mycima
[Accessed 11 November 2008]
Carson, D. et al. Price setting in SMEs: some empirical findings. Journal of
Product and Brand Management, 1998, Volume 7, Issue 1, pp 74- 86
Hogan, J. and Lucke, T. Driving growth with new products: common pricing traps
to avoid. Journal of Business Strategy, 2006, Volume 27, Issue 1, pp 54-58
Indounas, K. Making effective pricing decisions. Business Horizons, September
2006, Volume 49, Issue 5, pp 415-424
Krishnakumar, D., Markowitz, P. and Nagi, J. The pricing opportunity: discovering
what customers actually value. Strategy and Leadership, 2006, Volume 34, Issue
3, pp 23-30
Romani, S. Price misleading advertising: effects on trustworthiness toward the
source of information and willingness to buy. Journal of Product and Brand
Management, 2006, Volume15, Issue 2, pp 130-138
Simon, H. Pricing opportunities and how to exploit them. Sloan Management
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Pricing
Topic Gateway Series
Review, 1992, Volume 33, Issue 2, pp 52-62
Smith, G.E. and Nagle, T.T. Financial analysis for profit driven pricing. Sloan
Management Review, 1994, Volume 94, Issue 3, pp 71-84
Stamer, H. and Diller, H. Price segment stability in consumer goods categories.
Journal of Product and Brand Management, 2006, Volume15, Issue 1, pp 62-72
Other recommended articles
Avlonitis, G. and Indounas, K. The pricing opportunity: discovering what
customers actually value. Journal of Services Marketing, 2005, Volume19, Issue
1, pp 47-57
Hinterhuber, A. Towards value-based pricing: an integrative framework for
decision making. Industrial Marketing Management, 2004, Volume 33, Issue 8,
pp 765-778
Shipley, D.D. and Jobber, D. Integrative pricing via the pricing wheel. Industrial
Marketing Management, 2001, Volume 30, Issue 3, pp 301-314
Stitt, I. Transfer pricing for the next century. Accountancy, November 1995,
Volume116, Issue 1227, pp 92-93
Books
Baker, R. (2006). Pricing on purpose: creating and capturing value. New York:
John Wiley and Sons
Cram, T. (2005). Smarter pricing: how to capture more value in your market.
Harlow: Financial Times Prentice Hall
Dolan, R. and Simon, H. (1997). Power pricing: how managing price transforms
the bottom line. Cambridge: Simon and Schuster
Emmanuel, C. and Mehafdi, M. (1994). Transfer pricing. London: Academic Press
in association with the Chartered Institute of Management Accountants
Levey, M., Wrappe, S.C. and Chung, K. (2006). Transfer pricing rules and
compliance handbook. Chicago: CCH
Nagle, T. (2001). The strategy and tactics of pricing: a guide to profitable decision
making. Harlow: Prentice Hall
Phillips, R. (2005). Pricing and revenue optimisation. Palo Alto, CA: Stanford
University Press
Renneboog, L. (2006). Advances in corporate finance and pricing. Oxford:
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Pricing
Topic Gateway Series
Elsevier
Reynolds, P. and Lancaster, G. (2005). Management of marketing. Oxford:
Butterworth Heinemann
Zeithaml, V., Bitner, M.J. and Gremler, D.D. (2006). Services marketing:
integrating customer focus across the firm. New York: McGraw Hill
McKinsey and Company. (2004). The price advantage. New York: John Wiley and
Sons.
CIMA publications
Axelby, G. (2002). CIM course book 2002/03: Management information for
marketing decisions. Oxford: Butterworth Heinemann
Available from: www.books.elsevier.com/cima
[Accessed 11 November 2008]
Barnett, I., Dawkins, S. and Allan, W. (2005). CIMA exam practice kit: Decision
management. London: CIMA Publishing
Available from: www.books.elsevier.com/cima
[Accessed 11 November 2008]
Scarlett, R. (2005). CIMA Study System 06: Management accounting
performance evaluation. London: CIMA Publishing
Available from: http://books.elsevier.com/cima
[Accessed 11 November 2008]
Scarlett, R. (2005). CIMA Study System 05: Performance evaluation. London:
CIMA Publishing
Available from: http://books.elsevier.com/cima
[Accessed 11 November 2008]
Wilks, C. (2005). CIMA Study System 05: Decision management. London: CIMA
Publishing
Available from: http://books.elsevier.com/cima
[Accessed 11 November 2008]
CIMA Mastercourses
Effective transfer pricing: a practical introduction to transfer pricing: the
management and operational issues. To book via
www.cimamastercourses.com please go to Find and key in the course code
TRPR.
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Pricing
Topic Gateway Series
Accounting for marketing. To book via www.cimamastercourses.com please
go to Find and key in the course code ACMK.
Websites
Businesslink
Offers practical advice for business.
Available from: www.businesslink.gov.uk
[Accessed 11 November 2008]
An archive of individual articles from 1922 to the present can be accessed from
Harvard Business Review using Business Source Corporate on MY CIMA.
Available from: www.cimaglobal.com/mycima
[Accessed 11 November 2008]
First published in 2006 by:
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Management Accountants
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