MARKETING DECISIONS 115
1 The future selling price may be affected by accepting a special order, if competi-
tors adopt similar pricing tactics.
2 Customers who receive or become aware of a special selling price may expect a
similar low price in the future.
3 Accepting this order may prevent the firm from accepting a more profitable
order at a higher price if one subsequently comes along.
4 It is assumed that the business has spare capacity that has no alternative use.
5 It is assumed that fixed costs are unavoidable in the short term.
Transfer pricing........................................
One special pricing decision is that concerned with the price at which goods or
services are sold between business units in the same company, rather than the
arm’s-length price at which sales may be made to external customers. Transfer
prices may be based on:
žthe market price to external customers, including a normal profit margin;
žthe market price to external customers, but including a lower profit margin;
žthe total cost of producing the goods or services, including fixed and variable
costs but excluding any profit margin;
žthe marginal cost of producing the goods or services, i.e. including only variable
costs, with or without a profit margin;
žanegotiatedprice.
An important issue in establishing a transfer price is the motivational effect that
this may have on managers of both the buying and selling business units, who may
prefer to buy and sell on the open market. However, in the increasingly globalized
business world, manufacturing, assembly and selling operations may take place
in different countries. In these cases, transfer prices are often set to ensure that
reported profits are earned in countries where lower corporation tax is payable to
maximize the after-tax earnings of the multinational corporation. Transfer pricing
is discussed in more detail in Chapter 13.
Segmental profitability...................................
As well as being price-makers orprice-takers, businesses also adopt market-
skimmingormarket-penetrationstrategies at different phases of the product/service
lifecycle (see Chapter 9). A common marketing strategy isdifferential pricing,where
prices vary between each market segment.
Where products/services are sold in different market segments at different
prices, the price can be considered in different ways:
žA minimum short-term price taking into account only marginal, i.e. usually
variable, costs.
žA minimum long-term price that covers the full product/service cost.
žA target long-term price that takes into account the return on investment
necessary to increase shareholder value.