Pricing

Factors affecting pricing : price perception, quality, competitors, suppliers, inflation etc.

Factors affecting demand: fashion and test, customer expectation, 4P price, place, product, promotion.

Types of market:

1 prefect competition: many suppliers are dealing in identical product no can sit his own price.

2 monopoly: one supplier dominate market and he can set whatever price he want.

Oligopoly: few suppliers are dominate the market and have market power they don’t compete in price
term but in non price term.

Relation between price and demand: as per law of demand have inversely relations.

If we are want to find the strength of relationship we are need to compute the Price elasticity of
demand.

Price Elasticity of demand = %change in demand / %change in price

If price elasticity of demand are greater then 1 elastic demand, if lower then 1 inelastic in demand.

Elastic mean have more affect on demand.

Inelastic mean have less affect on demand.

How to find the price?

There are two approach 1 economist approach (use price function equation) 2 accountant approach(
cost plus pricing )

1 economist approach : use demand function equation P= a-bQ

P = price to be computed, a= price at which quantity is zero, b= change in price / change in quantity

Q= quantity at which price needs to be found.

Important point under economist approach :

1 profit maximization point MR = MC, MR=a-2bq

2 revenue maximization point 3 breakeven point MR=0

Price at breakeven unite: TR=TC

TR= aq-bq2

TC=FC+(VC/unite*number of unites)

−b ± √b −4 ac
2
q=
2a
This is called algebraic method

This model assume there is leanier relation between price and demand ie whenever price is increase
demand will fall with exactly same unite which may not always be the case.

Price is based on money external factor and this model ignore all those external factor like competitor,
government policy etc.

This model involve high low method computation and high low method ignore all variable other then
highest and lowest

How an accountant compute price?

He use the cost + pricing strategy take cost and add profit to get price. There are two way 1 take full cost
and add profit, 2 take marginal cost + profit.

Breakeven point in accountant approach = total fixed cost / contribution per unite.

There are two pricing strategy when a new product is lunched

1 price skimming, 2 price penetration

In skimming lunch product at high price and then lower down the price when this method is useful short
life cycle, innovation, cash flow issues.

Price penetration lunch product at low price then increase the price. When it is useful long life cycle, no
innovation, we want to discourage competition.