PRICING

Presented B
K.RAJESH KHANNA CHOWDARY
MEANING OF PRICE & PRICING

According to Kohler a price as-

“ the money Consideration asked for on
offered in exchanges for a specified unit
of goods on service ”

Pricing is the function of

determining the value of a product on
service in monetary terms.
OBJECTIVE OF PRICING POLICIES
The most important objectives of pricing are---
To achieve target return on investment an net
sales.
To maintain stability of prices and eliminate
price fluctuations.
To attain, maintain as improve target share of
the market.
To meet or prevent competition or eliminate
the competitor.
To maximize profits and
To protect its survival.
METHODS OF PRICING

Following are some of the important

methods of price fixation they are---
♠ Cost Plus Pricing.
♠ Target Return of Investment Pricing
(ROI).
♠ Marginal Cost Pricing.
COST PLUS PRICING

The prices are based upon total cost of

sales so as to cover both fixed as well as
variable cost and in addition to provide
for certain desired margin of profit.
It is also known as full cost, cost plus
and absorption costing method.

Contd….
Advantages: Cost Plus Pricing

‫ﻊ‬ It is simple to operate & prices can be

determined with ease and speed.
‫ ﻊ‬It ensured recovery of all costs, fixed as
well as variable.
‫ ﻊ‬It provides a reasonable rate of return to
the firm.
‫ ﻊ‬It ensures stability in the pricing policy &
selling prices can be justified to the
customer.
Disadvantages: Cost Plus Pricing
‫ ﻎ‬It ignores demand and hence many lead to under
pricing or overpricing of products/services.
‫ ﻎ‬It fails to consider the impact of competition.
‫ ﻎ‬It ignores the importance of marginal cost or
incremental cost as it uses the average cost
method.
‫ﻎ‬ It does not provide any incentive to the
management to bring down or control costs as
profit is determined as a percentage of cost.
RETURN ON INVESTMENT:
Under this method, price of a product is fixed to
give a desired rate of return on capital employed. The
price is determined by adding a certain percentage of
capital employed to the total cost. The markup % of profit
may vary from industry to industry. This method of
pricing is popular because it recognizes full cost of the
product plus a reasonable return on investment.
MARGINAL COST PRICING:
Under normal circumstances, the prices are
based upon total cost of sales so as to cover both fixed
as well as variable cost and addition to provide for
certain desired margin of profit. But prices may also be
fixed on the basis of marginal cost by adding a sufficient
high margin to marginal (variable) cost so as to cover the
fixed cost and profit.
However under other circumstances, products
may have to be sold at price below the total cost.
TRANSFER PRICES:
A transfer price is a price used to measure the price of
goods and services furnished by a profit centre to other
responsibility centers within a company.
there are various transfer pricing methods in use. This
methods are generally based on either cost or market price. The
various intra company transfer pricing methods are as follows:
1) cost price
2) cost plus a normal markup
3) incremental cost
4) shared profit relative to the cost
5) market price
6) standard price
7) negotiated price
8) dual or two way price