PRICING METHODS
PRESENTED BY: Rachana K S
Qaiser Pasha
Keerthi
INTRODUCTION
• In simple words , the pricing policy refers to
the policy of determining the firm’s product
under assumed market conditions for a given
period.
• Pricing policy is a pre-set statement of the
guidance about the pricing of output of a firm
for a given period under assumed business
situations in the market.
• “Pricing policies provide the guidelines within
which pricing is formulated and implemented.”
- CUNDIFF and STILL
FACTORS AFFECTING PRICING DECISION
Internal Factors
- Costs
- Business objectives
External Factors
- Demand
- Market competition
- Government policy
- Promotional business policies
- Profits
OBJECTIVES
• Maximization of profit
• Survival
• Return on investment
• Share of the market
• Market skimming
• Early cash recovery
PRICING METHODS
• Cost Plus Pricing or Mark up Pricing
• Rate of Return or Target Pricing Method
• Pricing Over The Life Cycle Of A Product
• Pricing Of A New Product
- Price Skimming
- Penetration Pricing
• Product Line Pricing or Pricing Of A Multiple Product
- Common Mark-up Percentage
- Incremental Cost Pricing
- Price Discrimination
- Maximization Of Net Revenue
• The Going Rate Pricing
• Administered Prices
COST PLUS PRICING
• Very common method of pricing.
• Based on costing of product.
• Includes costs of raw materials , labour overhead
expenses etc., and the determined percentage of profit.
• Also known as FULL COST PRICING or AVERAGE
COST PRICING.
PRICE = AFC + AVC + MARGIN
MERITS
• Eliminates frequent price fluctuations.
• Particularly suitable for industries where there is price
leadership.
• Logical method to maximize long-run profits.
• Simple method and easy to calculate.
• Reduces the cost of decision making.
• Full cost prices are deemed to be fair from the point of
consumers.
DEMERITS
• Completely ignores consumers preference on demand.
• May be based on a wrong conception of costs.
• Useless for industries whose products are perishable.
• Does not take account of the effect of competition.
RATE OF RETURN METHOD
• Refined version of cost plus method.
• The firm expects to earn a planned or target rate of
return on its investment.
• The company estimates future sales , future costs and
arrive at a MARK-UP PRICE.
• A producer rationally decides the minimum rate of
returns that the product must earn.
MERITS
• The profit mark-up is based on a planned rate of return
on investment.
• The analysis is based on full cost which is computed on
the basis of normal output.
PRICING OVER THE LIFE CYCLE OF A
PRODUCT
• Refers to different pricing for a product at different
phases of its life cycle.
• Introduction Phase :
- At this stage , the firm incurs higher promotional costs,
but the sales revenue is low ; it cannot cover many costs
fully.
• Growth Stage :
- There is rapid expansion of sales due to the effect of
sales promotion taken in the introductory stage.
- The company earns good profits after covering the
entire costs.
Continued….
• Maturity Phase :
-The rate of growth of its sales declines , though the
volume of sales keeps on increasing.
- Success inevitably leads to increased competition.
- Additional expenses are involved in the products
modification and improvement , thus profit margin slips.
- Useful because it gives out signals for taking
precaution in pricing policy.
• Decline Phase :
- The final stage.
- There is less demand for the product.
- Many businesses choose to lower its price.
- Discount pricing strategy increases customer traffic.
- Bundling can help get rid of the declining product and
increase sales.
PRICING OF A NEW PRODUCT
Price skimming :
• The first new product pricing strategy.
• Also referred to as market-skimming pricing.
• Setting high price for a new product to skim
maximum revenues layer by layer from those
segments willing to pay the high price.
• As a result , the companies make fewer but
more profitable sales.
• This policy makes sense under certain
conditions :
Quality and image must support the high initial
price.
Enough buyers must want the product at that
price.
Continued….
Penetration pricing :
• Keeping the price at a relatively low level for a newly
introduced product.
• The initial price of the product is relatively low in hopes
of penetrating market place quickly.
• This policy makes sense under certain conditions :
There is high short run price elasticity.
There is saving in the cost of production due to larger
scales production.
The potential competition is threatening.
The potential market for the product is fairly large.
The product by nature , should be just that it can be
easily accepted and adopted by the consumers.
PRODUCT LINE PRICING
• Concerns the problem of determining the proper
relationship among the prices of the members of a
product group.
• Alternative principles :
Common mark-up percentage.
- Complementary goods
- Substitutes
Incremental cost pricing.
Price discrimination.
Maximization of net revenue.
GOING RATE PRICING
• Competition oriented.
• The average price charged by the industry is accepted
by a firm for itself.
• The firm has the power to fix up its own price for the
product , it will not do so but instead it tries to adjust its
own price policy.
• The going rate pricing policy is adopted when :
There is price leadership of a dominant firm in the
market
Costs are difficult to measure.
The firm wants to avoid tension of price rivalry in the
market.
ADMINISTERED PRICES
• Administered prices are the prices that are fixed and
entered by the government.
• Normally set on the cost + a stipulated margin of profit.
• Characteristics :
Fixed by the government.
Statutory , i.e., they are legally enforced by the
government.
Regulatory in nature.
Outcome of the price policy of the government.
Meant as corrective measures.
• Basic objectives :
To maintain the prices of essential raw materials.
To ensure economic price to uneconomic units.
