Activity-Based Pricing

(noun)

Pricing based on all costs such as labor, building, and administration instead of only fixed costs.

Examples of Activity-Based Pricing in the following topics:

  • Cost-Based Pricing

    • Cost-based pricing is the act of pricing based on what it costs a company to make a product.
    • Cost-based pricing is the act of pricing based on what it costs a company to make a product.
    • Cost-based pricing involves setting a price such that:
    • Activity-based pricing is better than regular cost-based pricing in such situations.
    • Describe cost based pricing as it relates to general pricing strategies

  • Competition-Based Pricing

    • Competitive-based pricing occurs when a company sets a price for its good based on what competitors are selling a similar product for.
    • Competitive-based pricing, or market-oriented pricing, involves setting a price based upon analysis and research compiled from the target market .
    • With competition pricing, a firm will base what they charge on what other firms are charging.
    • One advantage of competitive-based pricing is that it avoids price competition that can damage the company.
    • Status-quo pricing, also known as competition pricing, involves maintaining existing prices or basing prices on what other firms are charging.

  • Competitor-Based Pricing

    • Competition-based pricing describes a situation where a firm has a pricing policy that reflects the pricing decisions of competitors.
    • Competition-based pricing describes the situation where a firm does not have a pricing policy that relates to its product, but reflects the pricing decisions of competitors.
    • The problems with competition-based pricing are that:
    • Competitor-based pricing is purely reactive.
    • Show the basis of competitor-based pricing as a general pricing strategy

  • Demand-Based Pricing

    • Demand-based pricing is any pricing method that uses consumer demand - based on perceived value - as the central element.
    • Demand-based pricing, also known as customer-based pricing, is any pricing method that uses consumer demand - based on perceived value - as the central element.
    • These include: price skimming, price discrimination, psychological pricing, bundle pricing, penetration pricing, and value-based pricing.
    • By definition, long term prices based on value-based pricing are always higher or equal to the prices derived from cost-based pricing.
    • Demonstrate the meaning of and the different types of demand-based pricing

  • Classification

    • Ratio analysis is a foundation for evaluating and pricing credit risk and for doing fundamental company valuation.
    • Activity ratios, also called efficiency ratios, measure the effectiveness of a firm's use of resources, or assets.
    • Classify a financial ratio based on what it measures in a company

  • Value-Based Pricing

    • Value-based pricing seeks to set prices primarily on the value perceived by customers rather than on the cost of the product or historical prices.
    • This image shows the process for value based pricing .
    • Many customer-related factors are important in value-based pricing.
    • Value-based pricing focuses entirely on the customer as a determinant of the total price/value package.
    • Examine the rationale behind value based pricing as a pricing tactic

  • Analysis of Price Discrimination

    • Although the cost of producing the products is the same, the seller has the ability to increase the price based on location, consumer financial status, product demand, etc.
    • It is evident throughout markets and generates the highest revenue possible by shifting the price of a product based on the consumer's willingness to pay, quantity demanded, and consumer attributes.
    • Premium pricing: uses price discrimination to price products higher than the marginal cost of production.
    • Gender based prices: uses price discrimination based on gender.
    • For example, bars that have Ladies Nights are price discriminating based on gender.

  • Ratio Analysis and EPS

    • If shares in a company are traded in a financial market, the market price of the shares is used in certain financial ratios.
    • The statements' data is based on the accounting method and accounting standards used by the organization.
    • Activity ratios measure how quickly a firm converts non-cash assets to cash assets.

  • Examples of Price Discrimination

    • Also, prices fluctuate based on time of travel (time of day, day of the week, time of year).
    • Companies increase the price of a good and individuals who are not price sensitive will pay the higher price.
    • Age discounts: age discounts are a form of price discrimination where the price of a good or admission to an event is based on age.
    • Occupational discounts: price discrimination is present when individuals receive certain discounts based on their occupation.
    • Gender based prices: in certain markets prices are set based on gender.

  • Psychological Pricing

    • Psychological pricing is a marketing practice based on the theory that certain prices have meaning to many buyers.
    • Inferring quality from price is a common example of the psychological aspect of price.
    • We call prices that end in such digits as 5, 7, 8, and 9 "odd prices. " Examples of odd prices include: $2.95, $15.98, or $299.99 .
    • Psychological pricing is one cause of price points.
    • The psychological pricing theory is based on one or more of the following hypotheses: