Cost-Price Relationships

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Demand

The demand concept is extensively explored in the microeconomics literature. Generally demand is analyzed together with supply because there are strong connections among those subjects. Depken (2005) says that the demand of a product is related to its price at a given period of time. At a glance such relationship seems simple and easy to understand, but there is a big difference between the theory of microeconomics and the practice. To analyze demand (and other aspects of the economy), economists assume that everything in the economy is held fixed. However, in practice, just a few factors are truly fixed, which makes economy analysis a difficult task to perform (Depken, 2005). In order to understand the complexity of demand, and consequently their relationship to supply, it is important to mention the elasticity concept. According to Depken (2005) elasticity measures the relative change in one variable in response to a relative change in another variable.

Forecast methods

There is a wide range of forecasting methods that can be used (Chamber, Mullick, & Smith, 1971), each has its advantages and disadvantages which makes them feasible for particular situations. Generally, they are divided in two groups: qualitative and quantitative methods. A prerequisite for quantitative methods is the historical data. With historical data on hands it is possible to identify demand patterns and consequently estimate future demands. The qualitative methods are used when historical data are lacking, and it relies in several sources of information in order to generate forecasts (Krajewski & Ritzman, 2002).
A common mistake among forecasters is the focus on the current product portfolio and new product ideas already generated. However, one aspect which is usually not considered is the concept of customer expectations. In many situations it is more interesting to figure out what is value to the customer rather than just forecasting demand for the current situation.

Costing Methods

Costing is an extensively studied subject which has taken the attention of economists, engineers, and marketers. Through the years, both academics and professionals of those areas have been striving to understand the mechanisms that affect the cost behaviour. So far, a lot of scientific work has been done, relevant conclusions have been reached but still this subject is not totally understood. Based on the idea that managers take cost information into account in the decision making process (Hansen & Mowen, 1995; Kaplan & Cooper, 1998), understanding the cost behaviour is a must. This following section aims to present the fundamental knowledge necessary to understand the costing methods relationship with pricing and forecasting. The main costing methods found in the text books are presented, as well as its advantages, disadvantages, and feasibility. In order to provide a better understanding about the subject, some terms will be introduced on beforehand.

Pricing Strategies

“Pricing is an art, a game played for high stakes; for marketing strategists, it is the moment of truth – all of marketing comes to focus in the pricing decision” (Corey, 1983). Price management is a popular research as well practical area within the field of marketing. Besides product, promotion and place/distribution management, pricing is one of the original four areas of the marketing mix (Kotler, Wong, Saunders, & Armstrong, 2005; Ivy, 2008; Lilien, Kotler, & Moorthy, 1992; Nagle & Holden, 1995). It is often considered to be one of the oldest fields within the marketing (Cannon & Morgan, 1991), and still has a large impact on the entire subject. Pricing is also one of the most flexible elements of the marketing mix and it can be changed rather quickly, this in contradiction to e.g. product features and channel commitments (Kotler, Wong, Saunders, & Armstrong, 2005). Finally, it is the only element from the marketing mix that actually generates revenues (Rao, 1984).

Table of Contents :

• 1. Introduction
  • 1.1 Background
  • 1.2 Purpose and Aims
  • 1.3 Delimits
  • 1.4 Outline
• 2. Theoretical Background
  • 2.1 Decision Making Process
    • 2.1.1 Decisions in Organisations
    • 2.1.2 Decision Making Processes
  • 2.2 Demand Forecasting Methods
    • 2.2.1 Demand
  • 2.3 Costing Methods
    • 2.3.1 Definitions in Costing
    • 2.3.2 Cost allocation methods
  • 2.4 Pricing Strategies
    • 2.4.1 What is price?
    • 2.4.2 Different pricing strategies
    • 2.4.3 Decision making within price management
• 3. Research Methodology
• 4. Cost-Price Relationships
  • 4.1 Costs and Prices within a single organisation
    • 4.1.1 Theoretical cost and price behaviour
    • 4.1.2 Cost-based pricing methods
    • 4.1.3 Market-based pricing methods
    • 4.1.4 Research model
  • 4.2 Cost and Prices within the Supply Chain
    • 4.2.1 Uncertainty and risks in organisations
    • 4.2.2 Supply contracts which affect pricing decisions
• 5. Costing-Forecasting Relationships
  • 5.1 Forecasts and Costs within a Single Organisation
    • 5.1.1 Cost of forecast accuracy
    • 5.1.2 Cost of forecast error
    • 5.1.3 Trade-off: cost of accuracy and forecasting error
    • 5.1.4 Research model
  • 5.2 Forecasts and Costs within the Supply Chain
    • 5.2.1 Level of aggregated demand
    • 5.2.2 Sharing forecasting
• 6. Price-Forecasting Relationships
  • 6.1 Price and Forecasts within a Single Organisation
    • 6.1.1 The use of Forecasts in Cost-based pricing methods
    • 6.1.2 The use of Forecasts in Market-based pricing methods
    • 6.1.3 Forecast and price relationships in the Product Life Cycle
    • 6.1.4 Causal methods
  • 6.1.5 Research model
  • 6.2 Price and Forecasts within the supply chain
• 7. The links between prices, costs and forecasts
• 8. Conclusions and Discussions
• 9. References
• 10. Search Words

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Decision making framework for managers: profit by forecasting, costs and price management