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Summary LU7: Pricing policy and Transfer pricing
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A summary of LU7: Pricing policy and Transfer pricing
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Luthando Zulu: 17599770Finance 2B – FINM6212
LU7: Pricing policy and Transfer pricing
Pricing policy:
This refers to the standard procedure used by a company to set its retail prices for its goods or services.
Any company’s primary objective when setting prices, is to recover its costs. Before setting the retail
prices or a pricing policy, a company needs to consider the cost of products and services, the
competition, the value as well as the demand for the prod/ service.
Due to this, each company will have different pricing policies, despite operating within the same market. A
pricing strategy refers to how a company uses pricing to achieve its strategic goals. These goals include
lowering prices in order to increase sales volumes.
Managers should begin to set the retail prices during the development stage of production, to avoid the
possibility of products being sold unprofitably. This enables an entity to match costs to the prices of
products, or remove products that generate higher costs than revenue. Prices are set primarily by the
marketing and finance managers of a firm.
There are various ways in which pricing policies can be determined:
Cost- based Selling price=Cost −based price+¿ profit percentage
pricing
The goal is to cover all costs of producing or delivering a prod or service, and still
attain a certain profit.
Value based The optimal selling price reflects the customer’s valuation of the product or
pricing service, not just the cost of producing the prod/ service.
Demand-based Managers are primarily concerned with customer behavior, or demand for a prod/
pricing service.
Competition- Companies decide on pricing by reviewing what their competitors are charging.
based pricing The response of competitors is also taken into consideration when setting prices.
Variables influencing pricing policy:
Internal and external factors that impact the pricing decisions in a company need to be considered:
Internal External
Company strategy, incl. marketing Nature of market (open or closed);
strategy (profit maximization, market Market competition and price elasticity of
share, product quality); demand;
Manufacturing and administrative costs; Economy (recession or boom);
Consistency with the basic pricing Impact of government and taxes.
philosophy;
Corporate responsibility and reputation;
Product characteristics;
Stage in the product lifecycle.
Optimum price and output level:
The optimum price is the selling price that maximises the profitability or market share for any product or
service. It is the highest selling price at which optimal output can be sold. Optimal output is where:
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