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Pricing of Product PDF
Pricing of Product PDF
T.Y. B. Tech
DIV B
Group Activity
PRICING OF A PRODUCT
Roll Nos
Price is the money that customers must pay for a product or service. In
other words, price is an offer to sell for a certain amount of currency. The
word, offer indicates that price is subject to change if there are found
insufficient number of customers at the original price of the product.
That is why prices are always on trial. If they are found to be wrong,
either they must be immediately changed or the product itself must be
withdrawn from the market.
“In essence, by and large, every facet of our economic life is directly or
indirectly governed by pricing. It is the prime regulator of production,
distribution and consumption of goods.”
Keeping the price stable may be the objective of pricing in some cases.
Minor charges in the market conditions are not taken into consideration.
This is done out of apprehension that a little rise in price may bring down
sales and the total return on investment will decline.
Sometimes firms even follow price-cut. This is done to make the position
of the rival firms worse. This is called entry prevention price. This policy,
of course, leads the firm to earn more profit in future and the loss sustained
earlier is more than compensated.
⚫ Raw Materials
⚫ Machinery
⚫ Labour
⚫ Transport
⚫ Overheads
⚫ Wastage
Raw Materials:
Raw material expenses refer to the cost of the components that go into a
final manufactured product.Raw materials have one of the highest impact
on the price of raw materials. The highest change in pricing of a product
is caused on how easily the raw material is available in the nature. If the
raw materials are easily available and easy to extract at low cost the final
cost of product goes down gradually. However, if the extraction and
availability is difficult it means it requires for labour and machinery
which increases the price of raw materials and hence the final cost of
product.
Machinery:
Every product requires certain machinery big or small to work on the raw
material and get the final product. The sensitivity of machinery its
precision and its finishing on the final product affects deeply on the
pricing of the product. Like if the machine to be used is a heavy
machinery and works on strong metal with high tolerance will thou be
costly in the start won’t have much effect on the finishing. Hence it is ok
that the machine made small mistakes in the tolerance zone so it will not
much increase the pricing of product. However, if we are working on
sophisticated raw material requiring high precision and has low tolerance
level then the machine has to be that much accurate thus the machine will
not only cost more but is also bound to require constant care and
maintenance which in turn will increase the final price of the product.
Labour:
Every industry requires labour for work. And the amount of labour the
work allotted to them and their role in the finishing of the product is what
affects the final price of product. If the workers work on heavy
machinery subjected to higher risks to safety or work on small machines
requiring high skills and precision in the finishing then the salary paid to
them will be high and thus it will increase the cost of the product.
However, if the risk is not high or not much skills are required then their
salary is low which helps lower the price of product.
Transport:
Overheads:
Wastage:
A. Internal Factors:
1. Cost:
While fixing the prices of a product, the firm should consider the cost
involved in producing the product. This cost includes both the variable
and fixed costs. Thus, while fixing the prices, the firm must be able to
recover both the variable and fixed costs.
6. Promotional activity:
The promotional activity undertaken by the firm also determines the
price. If the firm incurs heavy advertising and sales promotion costs, then
the pricing of the product shall be kept high in order to recover the cost.
B. External Factors:
1. Competition:
While fixing the price of the product, the firm needs to study the degree
of competition in the market. If there is high competition, the prices may
be kept low to effectively face the competition, and if competition is low,
the prices may be kept high.
2. Consumers:
The marketer should consider various consumer factors while fixing the
prices. The consumer factors that must be considered includes the price
sensitivity of the buyer, purchasing power, and so on.
3. Government control:
Government rules and regulation must be considered while fixing the
prices. In certain products, government may announce administered
prices, and therefore the marketer has to consider such regulation while
fixing the prices.
4. Economic conditions:
The marketer may also have to consider the economic condition prevail-
ing in the market while fixing the prices. At the time of recession, the
consumer may have less money to spend, so the marketer may reduce the
prices in order to influence the buying decision of the consumers.
5. Channel intermediaries:
The marketer must consider a number of channel intermediaries and their
expectations. The longer the chain of intermediaries, the higher would be
the prices of the goods.
⚫ Objectives of Firm
⚫ Competitive situations
⚫ Customer behaviour
⚫ Government regulations
Product Cost:
The second factor, the most important in determining price, is the cost of
the product itself. While making marketing strategy, the decision makers
should attempt to optimize the cost. The cost optimization helps in
determining reasonable price which provide equitable return on the cost
employed and vise-a-versa suits the customers’ buying power. In order to
optimize the cost of the product, the decision makers should study
different types of cost, viz., fixed cost, variable cost, and incremental
cost.
Objective of Firm:
The objectives set by the firm also influence the prices of its products.
For example, if the firm adopts skimming objectives, then the price
would generally be high. On the contrary, if the firm adopts the market
penetration as its objective, the price would normally be low.
Competitive Situation:
If competition exists between the products of the same line with similar
quality, the marketer should also watch the prices of alternative/
substitute products also while determining the prices of the competitive
product.
The fact remains that among the various factors, the demand for the
product concern is found exceptionally instrumental in guiding the
pricing decisions. As per the law of demand, if there is more demand for
the product, prices will be high and if there is low demand for the
product, prices will be low. However, essential goods like salt are
exception to this law of demand in affecting the price of the product.
Besides, seasonal nature of demand can also affect pricing policy by
making it possible to alter prices with the high and low seasons of
demand for the product. For example, with high demand for flowers,
fruits, and sweets during Diwali prices increase and decrease during
post-Diwali period.
Customer’s Behaviour:
Government Regulations:
While deciding pricing policy, the decision maker does not need to
underestimate the Government regulations imposed from time to time to
control the business activity in the country. Therefore, due weight-age
should be assigned to such regulations like Essential Commodities Act,
Industries Development and Regulations Act (IDRA), and the Defense of
India Rules (DIR).The basic purpose of these regulations is to optimize
and regulate the distribution of consumer goods. For instance, creating
artificial scarcity to raise prices of the products in the case of
Government regulation would be a futile exercise.
Skimming Pricing:
Under skimming pricing strategy, a Very high price is charged in the
beginning with a view to recover the cost involved within a shorter
period of time. This policy is feasible when the product introduced is
innovative and is used mainly by sophisticated group of customers.
However, the high price is usually supported by heavy promotion.
This policy cannot continue for a long period of time because high price
of the product attracts other manufactures/entrepreneurs also to plunge
into manufacturing. As a result, the competition sets in and the prices
tend to fall.
Penetration Pricing:
This is, in a way, contrary to the skimming pricing policy. Under this
policy, the price of the product is set at a lower level to penetrate into the
market. The underlying idea is to attract as many customers as possible at
the very outset. This policy can be adopted when the customers are very
particular for price and when the product is an item of mass consumption.
Once the product is accepted in the market, the price of the product is
gradually increased.
(ii) There is a difference in the demand and supply powers between the
locations.
(iv) There is a difference in the customers’ ability to pay for the same
product.
CASE STUDY 01
GOWNS
Making charges are almost Rs. 60/- per gown for a basic design
Making charges are almost Rs. 70/- per gown if it has high design like
embroidery
Assuming a plain design gown the average cost now goes to almost: Rs.
272.1/-
Wastage:
We consider almost 5% per meter in wastage so for each meter the
wastage is almost 5% of 70/- I.e Rs. 3.6/-
Each Gown has 3 meter so total wastage is almost Rs. 10.8/-
CONCLUSION:
The Cloth that costs Rs. 70/- per meter after processing and
manufacturing stages is finally sold at Rs. 670/- to the consumer.
The above procedure is how a Product is Priced in the Cloth Industry.
CASE STUDY 02
STARBUCKS
Pricing Strategy
They raise prices of 10% of their menu items per year with a negligible
rise of only 10-30 cents.
1. http://www.yourarticlelibrary.com/marketing/pricing/factors-affect
ing-pricing-product-internal-factors-and-external-factors/32313
2. http://www.yourarticlelibrary.com/marketing/pricing/product-prici
ng-objectives-basis-and-factors/74160
3. https://www.entrepreneur.com/encyclopedia/pricing-a-product
4. https://prezi.com/axuckdqr5d8b/starbucks-pricing-strategy/