METHODS OF PRICING

The various methods of pricing are: Full cost pricing Marginal analysis and pricing ROI pricing Differential cost-plus pricing Standard costs

 Involves

the total cost plus profit margin Includes both direct and indirect costs ADVANTAGES: Simple to operate Standardized and can be easily delegated Reasonable rate of return Helps to predict the price of competitive firms Stable pricing policy

DISADVANTAGES: Ignores demand and competition. This method cannot always shield the firm from a loss. In full cost pricing the choice of volume or capacity base is very important.

 Also

known as contribution approach. Uses only variable costs as basis for pricing. Fixed cost is not added to the product or service. However fixed cost is taken into account in determining profit margin.

 Advantages:

Helps to enter new business Improves the competitive position Helps to survive during trade depressions Disadvantages: Doubtful recovery of fixed costs Increase in marginal cost pricing may dissatisfy the customers

 One

of the practical approach to determine the normal markup percentage is to base it on Return on investment(ROI)
is a method used to determine the average profit mark up on costs necessary to produce a desired rate of return on the investments.

ROI

 SP=

TC+(Desired % of return on investment) Volume of Output

DIFFERENTIAL COST-PLUS PRICING: This method involves adding a mark up on differential cost which is increase in total cost resulting from the production of additional units. STANDARD COSTS: Standard costs represent the costs that should be attained under efficient operating conditions. In this method the cost s from efficient operation and an agreed profit is used to determine the price.