Course Title: Advance Performance Management

Assignment: 4

Program : BSAF

Section : B

Submitted by:
Ayesha Hamid L1F17BSCM0024
Amna Noor Tayyab L1F17BSCM0021
Moattar Zahra L1F17BSCM0020
Pricing:
“Price is amount of money charged for a product or service. It is the sum of all the values that
consumers give up in order to gain the benefits of having or using a product or service”.

How it is done:

1. Know Your Customer:

Undertaking some sort of market research is essential to getting to know your customer,
Willett says. This type of research can range from informal surveys of your existing customer
base that you send out in e-mail along with promotions to the more extensive and potentially
expensive research projects undertaken by third party consulting firms. Market research firms
can explore your market and segment your potential customers very granularly -- by
demographics, by what they buy, by whether they are price sensitive, etc. If you don't
have a few thousand dollars to spend on market research, you might just look at
consumers in terms of a few distinct groups -- the budget sensitive, the convenience
centered, and those for whom status makes a difference. Then figure out which segment
you're targeting and price accordingly.

2. Know Your Costs:

A fundamental tenet of pricing is that you need to cover your costs and then factor in a
profit. That means you have to know how much your product costs. You also have to
understand how much you need to mark up the product and how many you need to sell to
turn a profit. Remember that the cost of a product is more than the literal cost of the
item; it also includes overhead costs. Overhead costs may include fixed costs like rent and
variable costs like shipping or stocking fees. You must include these costs in your estimate of
the real cost of your product.

3. Know Your Revenue Target:

 You should also have a revenue target for how much of a profit you want your business to
make. Take that revenue target, factor in your costs for producing, marketing, and selling
your product and you can come up with a price per product that you want to charge. If you
only have one product, this is a simple process. Estimate the number of units of that
product you expect to sell over the next year. Then divide your revenue target by the
number of units you expect to sell and you have the price at which you need to sell your
product in order to achieve your revenue and profit goals.

4. Know Your Competition:

It's also helpful to look at the competition -- after all, your customer most likely will, too.
"Are the products offered comparable to yours?  If so, you can use their pricing as an
initial gauge," Willett suggests. "Then, look to see whether there is additional value in
your product; do you, for example offer additional service with your product or is your
good of perceived higher quality?  If so, you may be able to support a higher price.  Be
cautious about regional differences and always consider your costs."

5. Know Where the Market Is Headed:

Clearly you can't be a soothsayer, but you can keep track of outside factors that will
impact the demand for your product in the future. These factors can range from
something as simple as long-term weather patterns to laws that may impact future sales of
your products. Also take into account your competitors and their actions. Will a competitor
respond to your introduction of a new product on the market by engaging your business in a
price war?

Pricing methods:
The methods involve:-
The Pricing Methods are the ways in which the price of goods and services can be calculated by
considering all the factors such as the product/service, competition, target audience, product’s
life cycle, firm’s vision of expansion, etc. influencing the pricing strategy as a whole.

1. Cost-based pricing:

Cost-based pricing refers to a pricing method in which some percentage of desired profit margins
is added to the cost of the product to obtain the final price. In other words, cost-based pricing can
be defined as a pricing method in which a certain percentage of the total cost of production is
added to the cost of the product to determine its selling price. Cost-based pricing can be of two
types, namely, cost-plus pricing and markup pricing.

i. Cost-Plus Pricing: It is one of the simplest pricing method wherein the manufacturer
calculates the cost of production incurred and add a certain percentage of markup to it to
realize the selling price. The markup is the percentage of profit calculated on total cost
i.e. fixed and variable cost.

E.g. If the Cost of Production of product-A is Rs 500 with a markup of 25% on total cost,
the selling price will be calculated as Selling Price= cost of production + Cost of
Production x Markup Percentage/100
Selling Price=500+500 x 0.25= 625
Thus, a firm earns a profit of Rs 125 (Profit=Selling price- Cost price)
 ii. Markup pricing- This pricing method is the variation of cost plus pricing wherein the
percentage of markup is calculated on the selling price.

E.g. If the unit cost of a chocolate is Rs 16 and producer wants to earn the markup of
20% on sales then markup price will be: Markup Price= Unit Cost/ 1-desired return on
sales
Markup Price= 16/1-0.20 = 20
Thus, the producer will charge Rs 20 for one chocolate and will earn a profit of Rs 4 per
unit.

2. Margin-based Pricing:

The practice of setting the price of a product to equal the extra cost of producing an extra unit of
output is called marginal pricing in economics. By this policy, a producer charges for each
product unit sold, only the addition to total cost resulting from materials and direct labor.
Businesses often set prices close to marginal cost during periods of poor sales. For example, an
item has a marginal cost of 2.00andanormalsellingpriceis3.00; the firm selling the item might
wish to lower the price to $2.10 if demand has waned. The business would choose this approach
because the incremental profit of 10 cents from the transaction is better than no sale at all.

3. Competition-based Pricing:
Competition-based pricing refers to a method in which an organization considers the prices of
competitors’ products to set the prices of its own products. The organization may charge higher,
lower, or equal prices as compared to the prices of its competitors.
The aviation industry is the best example of competition-based pricing where airlines charge the
same or fewer prices for same routes as charged by their competitors. In addition, the
introductory prices charged by publishing organizations for textbooks are determined according
to the competitors’ prices.
4. Differential Pricing:

This pricing method is adopted when different prices have to be charged from the different group
of customers. The prices can also vary with respect to time, area, and product form.
E.g. the best example of differential pricing is Mineral Water. The price of Mineral Water varies
in hotels, railway stations, and retail stores.

5. Value Pricing:

Under this pricing method companies design the low priced products and maintain the high-
quality offering. Here the prices are not kept low, but the product is re-engineered to reduce the
cost of production and maintain the quality simultaneously.
E.g. Tata Nano is the best example of value pricing, despite several Tata cars, the company
designed a car with necessary features at a low price and lived up to its quality.

6. Target Return Pricing:

In this pricing technique you assign the price to the product in order to achieve target return over
your investment. For example you have invested 10,000 in your production and company. The
assumed sales volume that will be sold in the first one year is 1000 units and if you want to
recover your complete cost in the first year you need to yield a profit of 10,000 and you have to
add $ 10 to the cost of each good that will give you the sales price $60 again.

Markup= profit/cost*100
7. Perceived-Value Pricing: 

In this pricing method, the manufacturer decides the price on the basis of customer’s perception
of the goods and services taking into consideration all the elements such as advertising,
promotional tools, additional benefits, product quality, the channel of distribution, etc. that
influence the customer’s perception.

E.g. Customer buy Sony products despite less price products available in the market, this is
because Sony company follows the perceived pricing policy wherein the customer is willing to
pay extra for better quality and durability of the product.

8. Psychological Pricing:

Psychological pricing tries to influence the perception of customers about the price of a product.
It is used when a marketer wants customers to respond emotionally rather than rationally.
Psychological pricing is based on the fact that some prices have psychological impact on
customers. Some customers believe that high price is an indicator of the good quality of a
product. For example, products, such as high quality perfumes are more costly than normal
perfumes. The price becomes a good factor to judge the quality of a product if no other
information is available regarding a product.

9. Transfer Pricing:
It involves selling of goods and services within the departments of the organization. It is done to
manage the profit and loss ratios of different departments within the organization. One
department of an organization can sell its products to other departments at low prices.
Sometimes, transfer pricing is used to show higher profits in the organization by showing fake
sales of products within department.