According to Pricing trends for management accountants, an AICPA® & CIMA® report based on Professor David Dugdale’s CIMA-supported research for his book Strategic Pricing and Management Accounting, management accountants can advise on strategic price setting by considering the customer’s perspectives and focussing on the external value of a company’s products and services.
With a solid understanding of pricing theory, including value-based and segmented pricing strategies, management accountants can clearly identify and communicate economic value to their customers and help their businesses stay profitable.
Pricing theory conveys consumer value
In today’s changing and complex markets, understanding pricing theory is crucial for businesses to set prices effectively, helping them maximise profits and maintain competitiveness.
In competitive markets, companies need to differentiate their products or services from those offered by their competitors and pricing needs to reflect the strategies adopted.
Variants within a product range can cater to different customer preferences. Some customers prioritise affordability and may prefer a lower-priced option, while others want functionality and are willing to pay more. The key is to adjust product prices accordingly based on the customer’s willingness to pay.
Pricing trends for management accountants explains how to use pricing strategies to show customers the value of products or services. The report shows how recent findings from pricing theory can help in developing price strategy. For example, behavioural economics can provide new insights in business-to-consumer markets (B2C), highlighting the influences on how different customers perceive value.
Value-based and segmentation pricing
Value-based pricing focusses on setting prices based on the customer’s perceived value of the service and product. With a thorough understanding of this pricing theory, management accountants can bring their financial expertise to the table working as business partners with marketing and pricing executives.
Understanding customer behaviour and providing customers with a variety of products is important for creating effective value-based pricing strategies in B2C markets.
The report offers insight into examples of behavioural economics that influence customer decisions, including:
Anchor: A relatively expensive item that sets or “anchors” customer expectations and makes other items appear to offer more value by comparison. For example, a restaurant may offer an expensive wine to influence a customer’s decision, without the intention of actually selling it.
Decoy: An item that is clearly inferior item to a superior one A decoy directs customers toward the superior item — The one that the seller would like the customer to choose.
Extreme aversion: The likelihood that customers will choose the mid-price option in a range. Introducing a new top-range options, for example, can influence some customers to choose the new option and other customers to move up the range.
The report suggests that evaluating an entire product range’s profitability is important, rather than just looking at individual products in isolation. Although some products may not make money alone, they give customers choices or entice them to buy a preferred item. Be aware, however, that offering too many options to customers could confuse them.
When developing a value-based pricing strategy, consider the cost for introducing new product variants and the money spent on marketing and managing product varieties.
The report also provides insight into the important technique of product segmentation, in which companies target different customer groups by offering various products to meet the needs of a wide range of consumers. The product-price combination for each segment needs to be carefully considered, ideally taking account of the economic value to customer in each customer segment.
Pricing trends for management accountants lists four segmentation strategies:
Demographic segmentation: Giving discounts to specific groups such as students or seniors and considering the benefits of extra discounted sales against the loss in revenue from customers buying at a lower price
Geographic segmentation: Varying prices by location because of local market conditions — This can cause complications in global markets if low-priced items are resold in higher-priced regions, creating a ‘grey market’.
Quantity discounting: Offering a total quantity discount on all units when reaching a volume or value threshold or offering an incremental discount, which only applies to the extra volume above the threshold — Contribution from extra sales should be analysed against contribution lost through discounting.
Product-based segmentation: Offering a range of products to target customers with different budgets, preferences, and price sensitivities
These strategies also fall into two types of segmentation — direct and indirect. Direct segmentation prices apply to customer groups and different locations, while indirect segmentation offers a range of products at different prices, encouraging buyers to self-segment by their choice of product. For example, buyers may choose different product quantities or choose between branded and generic products.
Management accountants should be key business partners working with marketing executives in creating a segmentation strategy that reflects the cost of product offerings. The contribution generated by each product and the entire product range needs to be considered carefully when setting the price.
Become an integral factor in price setting
To convey economic value to the customer, management accountants can leverage their technical expertise and shift focus from an internal perspective to an external one when developing effective price-setting strategies.
Consider the company’s consumer goals and use pricing strategies that align with them to set the right price for a new product or service entering the market.
Discover how to use activity-based costing in real situations to understand overheads and cost drivers more clearly, which can lead to stronger decision-making.
AICPA & CIMA provide resources to better contribute to pricing decisions and implement strategies to create effective price settings, including a bundled set of materials specifically for cost accounting.
Enhance your knowledge of tactical pricing strategies and become an essential contributor to your company’s price-setting process by downloading the Pricing trends for management accountants report and accessing other useful tools from AICPA & CIMA.