CHAPTER-06 PRICING
DECISIONS
Q. What are the reasons of Reducing Price & Cost in Growth
Phase of Skimming Pricing Policy?
Reasons for
Reduction in
Price
1) Less Unique as
competitors will start
reverse engineering.
2) To discourage competitor
from entering market.
3) To gain market share /
achieve growth in sales volume.
INTRODUCTI PRICING PRICING THEORY OF PRINCIPLE OF
ON POLICIES / METHODS PRICE PRODUCT
STRATEGIES PRICING
Pricing 1. Full Cost Method OPTIMUM SELLING PRICE PROFIT MAXIMISATION MODEL
COST BASED METHODS
2. (ROI) / (ROCE)
Policies or methods for determining selling PRICING UNDER Price which gives  Based on Product Line
Method Profit is maximum at
price of product / service DIFFERENT MARKETS you maximum total
1. Going Rate Pricing profit. Ways in which price  Based on Customer Past Behaviour
Marginal Revenue = PRICE CUSTOMISATION customisation can be done
Large number of [PCDT]  Based on Demographics
TYPES OF PRICING Marginal Cost / Variable
sellers,selling Identical COMPETITION
Selling Price is average level charged by Product A Cost
(Homogeneous) Product or BASED METHOD  Based on Time Differentials
industry
Service
External Pricing Internal Pricing
2. Sealed Bid Pricing Current Selling Price = ₹ 25 P = Selling Price  Cash Discount
Perfect
 Free Entry & Exit
Competition a - 2bq
Chapter – 06 Chapter – 08 Divisional Variable Cost = ₹ 17 a = Price at  Quantity Discount
Pricing Decisions Transfer Pricing E.g. Medical / Cement IndustrY  Used in case of Tenders / Bids which demand is
Fixed Cost = ₹ 20,000 0 PRICE ADJUSTMENT POLICIES  Distributor Discount
No Price Policy (Market Price  Selling Price is lower than contract price
Pricing Policies / Pricing Methods set by competitors Demand = 10,000 units b = Change in Price  Geographical Pricing
Strategies (Theory) (Practical) Only one seller of product with no / Change in Quantity
Selling Price
substitute. VALUE BASED METHOD Based on Market Research  Price Discrimination [Differential / Peak
If price changes by ₹ 1 then demand Formula P = a – bq
changes by 1000 units q = Quantity Demanded Load Pricing]
Which SP is best for business? How to calculate that SP? Monopoly  Firm is price setter ROI / ROCE METHOD
It measures customer
E.g. MacOS, Microsoft Windows Meaning behaviour to change in price
It is based on of product
Any Price (Premium Price)
 Market Change in Price results in Change in
High
Large number of sellers selling similar but Demand / Customer Behaviour
Optimum Selling Price is ₹26.
 Product not identical product or service Types
Change in Price does not result in Change
Monopolistic Low
 Situation E.g. Mobile Industry, Restaurants  Selling Price = Total Cost (VC + FC) + in Demand / Customer Behaviour
Competition Desired Profit It is based on market research.
PRICE SENSITIVITY
CHANGE IN SELLING PRICE Market Price or Below Market Price 1. Unique Value Effect Low
& PRODUCTION COST  In case of surplus capacity, only
A. Reasons for DURING PRODUCT LIFE CYCLE Few number of sellers variable cost may be taken. (Especially FULL COST METHOD 2. Difficult Comparison Effect Low
Reduction in Cost selling identical product or Given)
service 3. Shared Cost Effect Low
 Always solve the questions on Total Basis Value or Benefit a product Value of Comparable Additional
1) Due to High Production Skimming Pricing Penetration Pricing intends to deliver to customer product of another features of your
Oligopoly E.g. Telecom Industry 4. Price Quality Effect Low
VALUE BASED METHOD firm product
Bulk Discount & Fixed  Predatory Price  Limit Factors that contribute 5. End Benefit Effect Low
Stage SP Production Cost SP Production Cost
Cost being spread Price  Raise Price Together Note: If any additional cost is incurred
over large no. of due to product, then it has to be reduced. 6. Total Expenditure Effect Low
units) CATEGORY OF NEW
Introduction High Price High Cost Low Price Low Cost
PRODUCT PERCEIVED VALUE = Customer willing to 7. Sunk Investment Effect Low
Learning & spend for a product.
Experience Curve
8. Inventory Effect Low
Growth Reduce Price Reduce Cost Increase Price Reduce Cost
Benefits  Replaces existing technology Then decide price = Lower than perceived
value but higher than cost.
9. Substitute Awareness Effect High
20% on sales = 25% on cost
Maturity Reduce or Constant ( Constant Increase Price Constant  Totally new
Revolutionary Product
E.g. Netflix, iPhone
Decline Reduce (Cost or below cost) Increase (Low Prodn) Constant Price Increase
Skimming / Premium Pricing
1. Perishable Goods – Any Cash Realisable
Value Upgraded version of earlier product
2. New Product for company but not for E.g. New Model of Phone
Evolutionary Product
market – Market Price
PRICING UNDER SPECIAL Price higher than earlier
3. Large Stock & Market has fallen CIRCUMSTANCES version (Demand Based
(Outdated Product) – Price below Marginal Price)
Cost / Variable Cost
Similar to / Copy of Revolutionary /
4. Pricing in period of Recession – Less Evolutionary product of others
than Total Cost but above VC/MC
Me Too Product E.g. Medicines
Penetration / Market Price
PRICING STRATEGY OF
NEW PRODUCT
SKIMMING / PREMIUM PRICING PENETRATION PRICING
Under this strategy, product is Under this strategy, product is introduced
introduced in the market at a in the market at a low price. When
high price, and later on the product is established in the market,
price is decreased gradually. price is gradually ncreased
Circumstances for adoption Circumstances for adoption
 Demand is inelastic  Demand Elastic
 Product has innovative features  For setting market / penetrate the
market
 Skim the cream by selling out few units
& earn higher profits  Substantial savings due to large scale
production [Economies of Scale]
 Huge initial cost incurred such as R&D
Cost, Patent Cost etc.  Threat of competition
 Product launched in highly priced segment
 Low level of production due to high cost
& to create shortage
 Reduction in price in later years may
increase sales