Lower price limit

In business administration, the lower price limit is the minimum price calculated in cost unit accounting for a product or service that ensures a company 's short- or long-term existence.

General

With intense competition ( price competition, for example in the polypol or oligopoly ), situations can arise that justify a price reduction to the lower price limit. For example, in a recession characterized by a drop in sales, management may be forced to lower sales prices in order to offset or minimize the decline in sales. Then it must be known to what extent the price reduction can be carried out without incurring losses .

The lower price limit indicates the sales price that a company must charge for its product or service in order to survive in the short or long term. It is part of the pricing policy of a company that, in competition with competitors, uses the market price as an instrument to increase the demand for its products or services through price reductions or to lower it through price increases. The price range extends from a lower price limit, at which profit is no longer possible, to an upper price limit, at which there is no longer any demand; in between are the prices of substitute products of the competition.

In the event of price reductions, the company must know the price at which the total costs or part of them can just be covered. When the lower price limit is reached, the company becomes a marginal provider .

species

With regard to the question of how long a company can survive the lower price limit, a distinction is made between short-term and long-term lower price limit:

• In the case of the short-term lower price limit ( absolute lower price limit ), costs are only covered for the variable unit costs , while a loss arises in the amount of the fixed costs . The corresponding production volume ( English output ) is the operating minimum . In the simplest case, the short-term lower price limit is the amount of the marginal costs .

The short-term lower price limit per piece is calculated by dividing the variable costs by the quantity produced ${\displaystyle kPUG}$ ${\displaystyle K_{v}}$ ${\displaystyle M}$

${\displaystyle kPUG={\frac {K_{\mathrm {v} }}{M}}}$.

For example, if the variable costs are 22,000 euros for 400 pieces, the short-term lower price limit is 55 euros. The associated production volume is the operating minimum. ${\displaystyle M}$

• With the long-term lower price limit , the total costs ( prime costs ) are covered, but no profits are made, because the company produces at breakeven point :

${\displaystyle lPUG=K_{v}+K_{f}}$.

The associated production volume is referred to as the operating optimum . In the example, the fixed costs assumed to be 12,000 euros must be added to the variable costs , so that the total costs are 34,000 euros. The long-term lower price limit is then 85 euros. This shows how significant the fixed costs are for a company. A cost reduction in fixed costs not only reduces the breakeven point (profit is generated earlier), but also has a disproportionate effect on the price. ${\displaystyle K_{f}}$

  Ergebnisrechnung:
  Umsatzerlöse
  - variable Kosten
  = Deckungsbeitrag 1
  - produktfixe Kosten
  = Deckungsbeitrag 2
  - produktgruppenfixe Kosten
  = Deckungsbeitrag 3
  - unternehmensfixe Kosten
  = Betriebsgewinn/Betriebsverlust

If the total sales are sufficient to cover all the total costs, the sales price has reached the long-term lower price limit.

• There is also the liquidity-oriented lower price limit . If the sales prices are aligned with the short-term lower price limit, a company can run into liquidity problems. Since only the variable costs are recorded in the short-term lower price limit, the fixed costs that lead to expenditure in the short term are not taken into account. These are particularly rental costs , labor costs , social security contributions , company taxes and insurance premiums . The liquidity-oriented lower price limit is determined as follows:

${\displaystyle {\frac {{\text{Variable Kosten}}+{\text{kurzfristig ausgabenwirksame fixe Kosten}}}{Absatzmenge}}}$.

In the group , the lower price limit for transfer prices based on the arm's length principle is the production costs plus a reasonable profit margin that would have to be paid by independent third parties for these goods.

Legal issues

According to the established case law of the Federal Court of Justice (BGH), the entrepreneur is fundamentally free to set his own prices within the framework of the current market economy- oriented economic system. According to this ruling, a time-limited offer of individual records below cost price without special circumstances is not necessarily anti-competitive. On the other hand, the permanent sale of products below the purchase price unduly affects smaller competitors and must therefore be prohibited in principle. The starting point of the litigation cited was the intervention of the Federal Cartel Office in the price war of German food retailers in September 2000 with the ban on Walmart , Aldi Nord and Lidl from selling products below the purchase price. The BGH forbade this practice if it was carried out by companies with market power over a longer period of time, but at least if they acted systematically.

economic aspects

In the price competition between companies for the same product or a comparable service, it can make sense to lower the sales price as a strategic action parameter in order to generate a higher sales volume . However, the price must be available as an action parameter for market behavior ( price adjuster ), because the quantity adjuster must offer at the given market price. Underemployment can be eliminated by lowering prices. The sales price can be reduced to the lower price limit, so that this represents the limitation of the price policy. Should the price fall below the lower limit, foregoing the sale fulfills the company's goals better than selling. If the price falls below the lower limit, products should be removed from the production program for economic reasons or an order or an order should not be accepted.

Individual evidence

1. ^ Hermann Diller / Andreas Herrmann (eds.), Pricing Policy Manual: Strategy - Planning - Organization - Implementation , 2003, p. 140
2. ↑ Springer Fachmedien Wiesbaden (ed.), Compact Lexicon Economy , 2014, p. 442
3. ↑ Hans Raffée, Preisuntergrenzencontrolling , in: Christof Schulte (Ed.), Lexikon des Controlling, 1996, p. 591 f.
4. ↑ Manfred Weber, Kaufmännisches Rechnen von A - Z , 2005, p. 115
5. ↑ Bruno Tietz, Euro-Marketing: Corporate Strategies for the Internal Market , 1990, p. 304
6. ↑ BGH, GRUR 1990, 371 , 380
7. ↑ i.e. below the short-term lower price limit
8. ^ BGH, decision of November 12, 2002, Az .: KVR 5/02 = BGHZ 152, 361
9. ↑ Wolfgang Becker / Stefan Lutz, Gabler Compact Lexicon Modern Accounting , 2007, p. 182
10. ↑ Hans Raffée, Consumer behavior , in: Bruno Tietz (Ed.), Hand dictionary of the sales economy, 1974, Sp. 1025 ff.
11. ↑ Wolfgang Kilger, Introduction to Cost Accounting , 1985, p. 409

Please note the information on legal issues!