Pricing

• 3 broad categories
–Cost oriented pricing
• cost plus of full cost pricing
• marginal or incremental or direct pricing
• target or rate of return pricing
• program pricing
 Pricing contd..
• Competition oriented pricing
– Going rate
– Loss leaders
– Trade association
– Customary
– Price leadership
– Cyclical pricing
– Imitative pricing
– Turnover pricing
 Pricing contd..
• Pricing based on other economic
consideration
– Administered pricing
– Dual pricing
– PD
• Cost plus pricing—price is determined by
adding a fixed mark up to the cost of prod
• Manufacturing sector
• Trading sector—mark up on wholesale prices
• Services sector—charge for labour time and
charge for material cost
– Limitations—only cost considered and not mkt dd
– No account of competititive forces
– Not applicable for perishable goods
• Marginal cost pricing—based on the incremental
cost of prod
• Based on VC
• Helps the firm to develop aggressive pricing
policy
• Useful for pricing over the life cycle of pdt
• Multi-pdt, multi-process and multi-mkt firms—
pdt, process and mkt have no impact on costs—
such cases marginal cost pricing is satisfactory
– Limitations—short period pricing
– No guarantee that firms operate at BEP
 When is marginal cost pricing
useful
• Introduction of a pdt in new mkts
• Stiff competition in mkt
• Has unutilized capacity
• Rate of return pricing
– Fixed % mark up over cost
– Profit as a fixed % of total sales
– Fixed return on existing investments

Program pricing
Price related to ss price. To cover its own cost
and profit margin, a mark-up is put over the ss
price. Popular in wholesale and retail trade
 Competition oriented pricing
• Going rate—firm examines the general pricing
structure in industry and fixes price of pdt
• Loss leaders—used in retailing biz. An item
which produces a less than customary
contribution or a negative contribution to
overhead but is expected to create profits in
future—charge relatively low prices on some
popular pdt with the hope that customers who
come for this pdt will also buy some other pdts—
seconds sales
• Trade association pricing—express or implied
agreements to maintain prices at similar level
– Price cut may spark off price war
• Customary pricing—prevailing price over a long period
of time—new firms cannot set their price closer to
customary price they cannot survive
• Price leadership—one or many big firms whose cost of
prod is low dominate the industry—cadbury and HLL
• Cyclical pricing—seasonal and cyclical price
fluctuation in industry
• Imitative pricing—used in retail biz, follow price leader
• Turnover pricing—mark up on high turnover pdts shd
be lower as these items are purchased by conumers
quite frequently and price diff shifts consumers—
electric bulbs
 Pricing under economic
considerations
• Administered prices—statutorily fixed by
govt considering cost and stipulated profit
per unit—PDS, fair price shops
• Dual pricing—commodity covered
simultaneously under administered prices
and mkt price—sugar. Can have multiple
fixed prices if consumers are categorized
—steel to defence, rlys, construction and
rest of consumers
 PD
• Time price differentials—telephone charges during day
and night
• Use PD—different uses of a pdt—rlys for transportation,
electricity and LPG for residential and commercial
• Quality PD—to consumers who are concerned about
quality—differences in consumers’ mind rather than on
the pdt
• Qty PD—cumulative discounts, distributors discounts
• Geographic PD—different prices to different customers
—FOB price (at the origin), delivered price (point of
destination)
• Personal PD—sellers give discounts to certain
customers for personal reasons based on loyalty and
frequency of purchases
• Cash discounts—promptness of payment
 Pricing strategies
• Stay out pricing—firm not certain about the
price at which it will be able to sell the pdt,
it starts at a very high price—helps the firm
to ascertain the max possible price it can
charge form its customers
• Price lining—price of one pdt in the total
range is fixed and the rest of the
commodities is automatically determined
by the relationship between the commodity
and the rest of range—prices of shirts,
shoes, socks
 Pricing strategies
• Psychological/odd no./round pricing—99/- or
80.95
• Limit pricing—establish a price that reduces or
eliminates the threat of entry of new firms
• Skimming price—take advantage of the target
segment’s willingness to pay a high price—dd
inelastic, not sensitive to prices, high prices
unlikely to attract competition
• Penetration pricing—highly sensitive mkt, high
price elasticity, low price to discourage
competition
 Pricing strategies
• Sliding down the dd curve-initially high
price, gradual lowering as mkt develops and
productive capacity expands—similar to
skimming but not deliberately discriminatory
• Premium pricing—high price policy to
enhance quality image
• Put out pricing—very competitive pricing
aimed at eliminating a weak competitor
 Pricing in large enterprises
• Pricing to achieve a ‘target return’ on
investment
• Stabilization of pricing and stable profit margin
• Pricing with an aim to increase firm’s return—to
improve market position
• Pricing to meet or follow competition
• Pricing related to PD
• Price leadership
• Pricing on the basis of rule of thumb technique—
20% increase in raw material rate resulting in
increase in prices by the raw material
composition in end pdt
 Pricing in small enterprises
• Prices adjusted according to changes in
mkt conditions
• Cost only a reference point and not a
pricing variable
• Small firms don’t aim at target rate of profit
• Small firms simply match the price with
large firms
• Many cases—trial and error method—
when info is lacking
 Resale price maintenance
• Popular in branded pdts
• Done to maintain a uniform selling price of
the branded pdt at all outlets
• Kinds—collective RPM
– Individual RPM
 Advantages and disadvantages of
RPM
• Enhances firms reputation by keeping
uniform and stable prices
• Elimination of competition
• Elimination of profiteering by retailers
• Consumers interests are safeguarded
• Disadvantages—anti-competition
– Exploit customers with high prices