Pricing method Price is very important to both buyer and seller.

The buyer always wants to by at a very low price while seller always desires to sell at a high price. Price is the money value of goods and services. To the seller price is a source of revenue. To the buyer, price is a sacrifice of purchasing power. Pricing varies with (a). Nature of products (b) Objective of the firm (c) Markets. Formulating price policies and setting the price is often a critical factor in the successful operation of business organizations. The basic pricing ingredients are (1) Costs (2) Competition (3) Demand and (4) Profit. The job for management is to develop and implement an appropriate pricing strategy that meets the needs of the organization. 1. The classical or conventional price equation, 2. Market place price equation, 3. Sales persons price equation, 4. Consumer driven price equation, 5. Competition drives price equation, Importance of price The value and utility of a product have to be set against its price. Price is important to the producer because a. It is the source of income b. It enables him to plan his product c. It helps him to withstand competition d. It regulating the demand for a product Price is important to consumer because a. Indicator of quality b. Help to allocate his income according to his wants and needs Importance of society a. It is the mainstay of the economic system. b. It is the principal instrument for the proper allocation of resources. Objectives 1. Profit maximization 2. Market share 3. Target return on investment Price = cost + profit price = product + quality + service price = rupees equivalent of value of product Price = what the consumer will pay price = level offered by competitors.

4. Prevent or meet competition 5. Price stabilization 6. Resources mobilization 7. Survival and growth 8. Prestige and goodwill 9. Achieving product quality leadership Factor influencing pricing decisions The factors influencing pricing decision vary form industry to industry and from business to business. The factors are 1. Internal factors 2. External factors Internal factors 1. Cost of production. 2. Objectives. 3. Organizational factors 4. Marketing mix 5. Product differentiation 6. Product lifes cycle 7. Characteristics of the product. External factors 1. Demand 2. Competition 3. Distribution channels 4. General economic condition 5. Government policy 6. Reaction of consumers Pricing polices Pricing objectives lead to pricing policies and strategies. Objectives are broad and general but policies are concrete. Pricing policies represent the general frameworks within which pricing are taken. Pricing is the policy adopted to determine the prices of a product. The factors considering pricing policies are 1. Price of competitors product 2. Cost of production and distribution 3. Price of different items in product line

4. Scope of changing price 5. Objectives of the business 6. Market position 7. Price elasticity and Demand elasticity Steps to formulating pricing polices are: 1. Select the target market 2. Studying consumer behavior and collecting information about market 3. Studying the prices, promotion strategies of the competitors and its impact on the market segment. 4. Calculating the cost of manufacturing the product at different levels of demand. Method of pricing 1. Cost based pricing policies 2. Demand based pricing policies 3. Competition based pricing policies 4. Value based pricing policies Cost based pricing policy The policy of setting price essentially based on the total cost per unit is known as cost oriented pricing policy. They are 1. Cost plus pricing Under this method, prices are fixed to cover all cost and a predetermined percentage of profit. Costs include production cost [both variable and fixed] administrative cost, selling, and distribution [variable and fixed]. This method is also known as margin pricing or average cost pricing or full cost pricing or mark up pricing. Advantage 1. This method is appropriate when it is difficult to forecast the future demand 2. This method guaranties recovery of cost 3. Its help to set price easily 4. Ensures stability in pricing 5. Economical for decision making Disadvantage 2. 3. 4. This method ignores the effect of demand Does not considering the forces of market and competition This method uses average cost, ignoring the marginal cost

Target pricing Under this method, the cost added with a predetermined target rate of return on capital invested. In this case, company estimates future sales, future cost and calculates a targeted rate of return on investment after tax. This method is also known as rate of return pricing, Advantage 1. This methods guarantees a certain rate of return on investment 2. This method can be used for pricing new products 3. This is a long term policy Disadvantage 1. This method is not practical when there is a tough competition in a market 2. This method ignores the demand of the product 3. Difficult to determine the cost of products 3. Marginal cost pricing Under both full cost pricing and rate of return pricing, the prices are set based on total cost [variable cost + fixed cost]. In this method, price is determined based on marginal cost or variable cost, fixed costs are totally excluded. Advantage 1. Useful in a competitive market 2. This method helps in optimum allocation of resources. Which will useful when the product have low demand 3. Suitable to pricing over the life cycle of the product. 4. It is most suitable method of short run pricing. 5. This method is useful at the time of introducing a new product. Disadvantage 1. Firms may not be able to cover up costs and earn a fair return of capital employed. 2. It requires a better understanding of marginal costing technique 3. When cost are decreasing this method is not suitable because it will result loss 4. Not suitable for long term. Break even pricing This is form of target return pricing. It is a refinement to cost oriented pricing. Under break even pricing, break even analysis is used for pricing. In break even analysis, first we have to determine the break even point.

Under this method price of product = average cost of product. i.e both variable cost and fixed cost are covered under this method but it does not include profit. Importance 1. Help to understand the relationship between revenue and cost of the company is relation to its volume of sales. 2. Very much important in planning 3. It helps the marketer in 1). Calculating output or sales to earn a desired profit 2) Calculating margin of safety 3) Making decisions 4). Change in costs and prices etc. Break even analysis The management applies a technique to find interrelationship among cost, volume and profit is called break-even analysis. In board sense, BEA concerns with the calculation of the probable amount of profit at different levels of activity. In narrow sense, BEA concerned with the calculation of the BEP. BEP is the point where no loss, no profit. In algebraic method BEP (units) BEP (Rs) = = fixed expenses Contribution / unit fixed expenses x sales Contribution

Break even chart

Margin safety Margin safety = total sales - BEP sales Angle of incidence The angle formed at BEP is known as Angle of incidence Assumption of BEA 1. All cost can be segregated in to fixed and variable elements. 2. Variable costs vary in direct proporation to output and fixed cost remain constant. 3. Cost and revenue have linear relationship 4. The selling products remain the same 5. The price of input factors such as materials, wages, rent, advertisement etc. remain constant. 6. There is no change in the efficiency of workers and in production technique. 7. There is no change in the level of stock. Other words entire production is sold.

8. Firm produces a single product. If it produces more than one product, there is no change in the sales mix ratio. Application of break analysis 1. It is used in profit planning 2. Used to determine sales volume required to attain a desired amount of profit 3. It is used to determine the margin of safety 4. It is used to determine sales volume required to offset the effects of price changes or cost changes. 5. It is very useful in selecting most profitable alternative. 6. It is helpful in determining optimum sales mix. 7. It is applied in make or buy decisions 8. Used in performance evaluation and cost control 9. It assist in the formulation of price polices. Advantages 1. it helps to determine the unit cost of a product for a particular quantity of production 2. It pin points the relationship among cost, price and profit. 3. useful determining the minimum level below which output cannot be allowed to fall 4. It helps in estimating the effects of different prices on profit. 5. Very useful in profit planning. 6. It suggest about selling price fixation. 7. It is used in the preparations of flexible budgets. 8. It enables management to choose profitable products, product mix, method of production, channel distribution etc. 9. Helpful in making capital investment decision. Limitations 1. There are many production process in which fixed and variable cost cannot be separated. E.g. Mining, fishing. 2. This is basically a short term concept not useful in long term planning. 3. It is a static analysis. ie measures relationship among costs, volume and profit at a given point of time. 4. All unit that are produced may not be sold out 5. It is useless when material costs fluctuate violently, product mix varies and technology improves.

Demand - based pricing policy Under this policy, demand is the basic factor. The price is fixed according to the demand for a product. Where the demand is low, a low price is charged. 1. differential pricing Under this method, the same product is sold at different prices to different customers, in different customers in different places and different periods. Eg . Cinema Theater charges different rates for different categories of seats, Telephone tariff rate 2. Modified break even analysis This is a combination of cost based and demand based pricing techniques. This method reveals price quality mix that maximizes total profit. In other words, prices are fixed to achieve highest profit over the BEP in consideration of the amount demanded at alternative prices. 3. Premium pricing [high pricing] It is based on the principle that the product or brand should be positioned at the top of the market and must offer greater value in qualitative terms than similar based in other price segments. 4. Neutral pricing Offering extra value or benefits with the brand cost or price remaining competitive. Competition based pricing policy In competition, based pricing policy the firm may keep its prices high or lower than that of competitors. In this policy, pricing decisions is not based on cost or demand. The prices are changed or maintained in line with competitors price. Going rate pricing Prices are maintained at par with the average level of prices in the industry. The firm adjustment its own prices to suit the general price structure in the industry. i.e method of charging prices according to what competitors are charging. A firm selling homogenous product in a highly competitive market usually adopts this method. This method also called acceptance pricing or market equated pricing or parity pricing. Advantages 1. Help to avoid cut- throat competition among the firm 2. This method is fund more suitable when cost are difficult to measure 3. This method is less expensive because calculation of cost and demand is not necessary 4. Suitable to avoid price war in oligopoly

5. This can be used for pricing new product. Disadvantages 1. this method is not suitable for long run pricing 2. Cost of the product and other marketing factors are not considered at this policy. Customary pricing In case of some commodities, the prices get fixed because they have prevailed over a long period. i.e price is customarily fixed. The price will change only when the cost changes significantly. Before changing the customary prices, it is essential to study the price of competitors. Some time customers prices may be maintained even when product model are changed. Sealed bid pricing In all business lines when the firms bid for jobs competition based pricing is following. The firm fixes its prices on how the competitors price their products. Value based pricing Under this policy the price is based on value to the customer. 1. perceived value pricing In this method, judging demand based on value perceived by the consumers in the product. i.e. setting the price on the basis of value perceived by the buyer of the product rather than the sellers cost. Value for money pricing Under this method price is based on the value which, the consumers get from the product they buy. Pricing of new products The introduction of a new product will pose a challenging problem for any firm. In the case of new products there is no past information for ascertaining trends and consumers reaction. If the new product is with high distinctiveness among the existing product, then price should be based on demand, market target and the promotional strategy. In the case of pioneer product the estimation of its demand very difficult and made on following factors. 1. Product acceptability The manufacture should ascertain whether new product will be accepted by consumers or consumers willing to by the products. Willingness to by depend upon the factor like whether it would meet their requirement.

2.

Range of prices

The question is that what prices different quantities of the product are demanded. 3. Expected volume of sales The determination of anticipated volume of sides at different prices. This depends upon demand elasticity and cross elasticity. 4. Reaction to price Company should always asses the location of consumers to the price also check the activities of competitor. Methods of pricing of new products Two type Skimming price policy This done with the basic idea of gaining a premium from those buyers who always ready to pay a much higher price than others do. Accordingly, a product is priced at a very high level due to incurring large promotional experience in the early stage. The skimming price policy aims at skimming the cream of demand at the initial stage by keeping a very high price and it will reduced later step-by-step. Reasons for this is a. On the initial stage of the production of a product demand is relatively inelastic b. To recover the heavy expenditure incurred on research and promotion of new product c. When there is no close substitute d. Electricity of demand is not known e. Buyers have no measuring rod for comparing value and utility f. To attract the consumers of high income group. Penetration price policy This is the practice of changing a low price right from the beginning to stimulate the growth of the market and to capture a large share of it. Since the price is lower, the product quickly penetrates the market. Reasons for adopting penetration prize policy is 1. The product has high price elasticity in the initial stage 2. The product is accepted by large number of customers 3. Economies of large scale production are available to a firm 4. The potential market is fairly large and has good deal of future prospects 5. When cost of production is low 6. To discourage new competitors development, sales

7. When most consumers are from low income group Above two methods are opposite each other and firm can adopt any of these strategies depends upon the nature of product market conditions. Kinds of pricing (Pricing strategy) Pricing policy means a policy determined for normal conditions of market. Pricing strategy is a policy determined to face a specific situation and is of temporary nature. The situations are. 1. Psychological pricing Some manufactures fix the prices of their products in the manner that it may create an impression in the mind of consumers that the prices are low. Eg. price of Bata's products are fixed as 299.95,499.99 etc. 2. Geographical pricing Charging different prices for the same product to customers in different geographical location. Eg variation of fuel price according to transportation cost Base point pricing It is the price designate based on a base point. The seller charges all customers the fright cost from that base point to the place of customer, regardless of the city from which the goods are actually shipped. Thus, the base point price is equal to factory price plus transportation charges calculated with reference to the base point. Zone pricing Under this method the company set up two or more zones and charges same price for all customers within a zone and different prizes in different zone. Dual pricing When a manufacture sells the same product at two different prices, it is called dual pricing. Eg. Sells a product to govt. agency is lower than direct customer in same location. 6. Administrated pricing Here the pricing is done on the managerial decisions and not on the basis of cost, demand, competition etc. 7. Mark up pricing Wholesaler and retailers follow this method of pricing. When goods are received the retailers adds a certain percentage of wholesalers price on products. 8. captive product pricing In these procedures, fix low prize for their main products and high price for the captive products.

Eg. Camera film, razor blades etc. Street price It is the price in a standard shop in a city or a locality. It generally meant to reflect the average price at which a product is available to an average consumer. General principles of price fixation 1. The price must cover the cost of production and reasonable profit. The profit should be enough to assure a fair return on the investment and a compensation for risk 2. In beginning, it is desirable to cover the prime cost and later on the entire cost. 3. While fixing the prices, it should consider competition and the influence of substitute 4. Goods having elastic demand can be priced higher and vice versa. 5. If demand of the product is low, the firm should reduce the price. 6. If the production cost increase, the firm may increase the price. 7. Price also depends on the type of article rate of turnover. 8. Capacity of plant must be used to the optimum extent. 9. Prices should not go against the public interest 10. Govt. policy should be taken into consideration 11. In case of some articles, which are seasonal, the firm has to assume additional risk, incur additional expenditure on storage and has to pay interest on the amount of capital locked up. Hence, these factors have to be considered when fixing the price. Government invention policy Government in most countries plays an important role in product pricing. Government intervention may be in the form of regulation of prices, profits or dividends or nationalization of the business world. Reasons for government intervention 1. Government fixes the price for goods if the goods are produced exclusively in the public sector. 2. Government has to fix the price if the goods are essential for human consumption or for the economic development of the country. 3. In order to ensure speedy and balanced development of the economy and effective utilization of nations resources the government has to interfere in the business activities and pricing of products.

4. Government participation is necessary to lay strong base for fortune development of industry and commerce. Eg. Power, fuel, iron, steel transport, atomic energy and communication. 5. Government participation is necessary to restrain private business from engaging in practice that are harmful to public. 6. Protect small scale unit from unfair competition of big organization 7. To meet basic needs of the weaker section 8. To prevent charging excessive prices and from undue profit making. Problems of government interventions 1. Government intervention curtails freedom to the private sector. 2. There is considerable delay in the implementation of plans. 3. Frequent changes laws and statutory requirements create an atmosphere of distrust in the minds of the enterprises. Method of price control 1. direct control 2. indirect control Direct control 1. Administrative price Bureau of industrial costs and prices, public enterprises contributed by inter ministerial committees or groups are fixing the prices of certain and services like steel products, cements, coal, fertilizers, electricity, some drugs, fuel etc. The main objective of the administrative price system is to protect the interest of both the producers as well as consumers. Eg. Public distribution system, minimum support prices. Dual pricing Some commodities, which suffer from chronic or recurring shortage like sugar, cotton table, paper and aluminum, are subject to dual pricing in India. A part of the annual production of factories in the private sector required to be sold by them to customers directly or through government controlled agencies at prices fixed by the government. However, they are free to sell the balance at whatever price that market can bear. Selling products like kerosine, wheat etc. through public distribution system. 2. subsidisation To protect the weaker section and priority sectors the government will give subsidies in certain products, which is essential to them.

3. Essential commodities The essential commodities act 1955 provide in the interest of public, for the control of production, supply and distribution of certain commodity. 4. other laws of control product in and distribution and prize 1. MRTP Act 1969, drugs and cosmetics act 1940, packaged commodities order 1975, drug control act 1950. Industrial development and regulation act 1950, consumer protection act 1986. Indirect control Indirect controls are exercised through monetary fiscal and commercial policies. Monetary policy refers to the policy of the central bank of the country. Price can be arrested by monetary contraction and fall in the price is dealt with by monetary expansion. Central bank has been employing bank rate policy. Fiscal policy is that policy which should go hand in hand with monetary policy of the government in matters of public revenue and public expenditure Fiscal policy can influence the price level by increasing or reducing the purchasing power of the public. Eg. Taxes Commercial policies will be used to stabilize the domestic economy to a certain extent. Price can keep under control by increasing the supply or importing goods.