RAMIREZ, SHAIRA M.

BSA-5 August 5, 2019

Pricing Policies and their Role in the Organization

Price policy definition is one of the most important decisions in management as it

affects corporate profitability and market competitiveness. When pricing a product in the
marketplace, a company must decide on a strategy.

Price is the sum of all the values that consumers exchange for the benefits of having
or using the product or service. The decision is critical. The choice of pricing policies
determines the methods of distribution and the size of advertising and marketing budgets.

The price of a good or service is affected by many factors: Pricing Objectives,

Demand, Cost Considerations and Environment. Regardless of the factors involved, the
price must cover the costs of the good or service as well as earn a reasonable profit.

To determine an appropriate price, a company must have a good understanding of

market forces. Where products are not easily differentiated from competitor goods, prices
are not set by the company, but rather by the laws of supply and demand – such companies
are called price takers. Where products are unique or clearly distinguishable from
competitor goods, prices are set by the company.

Target Pricing

The price is determined first and then the cost is arrived at keeping in mind the
desired rate of return.

Minimum Pricing

For this type of pricing, the selling price is the lowest price that a company may sell
its product. Normally the price will be the Total Relevant Costs of Manufacturing. Useful
method in situations where there is a lot of intense competition, surplus production
capacity, clearance of old stocks, getting special orders and or improving market share of
the product. Minimum Price is Incremental costs of manufacturing + Opportunity Costs ( if
any). The minimum pricing is essentially the breakeven point for that given sale. Any
pricing above the absolute minimum results in profits.

Transfer price - price used to record the transfer between two divisions of a
company.
 Ways to determine a transfer price:

1. Negotiated transfer prices.

2. Cost-based transfer prices.

3. Market-based transfer prices.

Conceptually, a negotiated transfer price is best. But due to practical considerations,

companies often use the other two methods.