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    Managers should base pricing decisions on both cost and market factors. In addition, they must also consider legal issues. Describe the influence that the law has on pricing decisions.

    "It is impossible to use DCF (Discounted cash flow) methods for evaluating investments in research and development. There are no cost savings to measure, and we don't even know what products might come out of our R&D activities." This is a quote from an R&D manager who was asked to justify investment in a major research project based on its expected net present value. How would you respond to this statement? Do you agree or disagree? Explain.

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    Solution Preview

    THE FACTORS MANAGERS BASE THEIR PRICING DECISIONS ON
    Price is of fundamental importance as it is the only mix element that
    actually generates income. But, before any pricing decisions can be
    undertaken it is important that the factors influencing price are
    understood. These factors can be categorized as internal and external.
    Pricing decision have to be adapted to a variety of situations and market
    segments. This calls for a systematic and well-planned approach that will
    lead to an acceptable range of price levels. A systematic approach should
    lead to a more reasoned and complete picture of available pricing options.
    This approach has two main stages; analysis of the pricing environment,
    and price determination.
    The internal factors affecting price include: company objectives and
    strategies (with an emphasis on integration); costs and classification
    (including fixed and variable costs); economies of scale; experience
    effects; price escalation; and the cost of implementing various pricing
    schemes.
    A core issue of pricing is the impact of price on demand and sales
    volume. Price-volume relationships relate to basic supply and demand
    theory and include the effect of branding and stages in the PLC on
    demand. Recognition has to be given to the differences between
    individual customers and industrial customers. The effect of the
    competitive environment on competitive activity is also important
    including the structure of the market, level of market concentration and
    the existence of legal requirements. The channel environment, legal
    environment, consumer pricing regulations and the international setting
    are also key issues in the determination of price.
    Pricing objectives, in line with company objectives, strengths and weaknesses, exploit the possibilities of the marketplace. They can be classified in a number of ways and they provide overall ...

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