PRICING

PRODUCT and PRICING

are extremely important
aspects of Marketing
Management.
FIXED PRICING
 Fixed Pricing

Most firms use a fixed price policy.

That is, they examine the situation,
determine an appropriate price, and
leave the price fixed at that amount
until the situation changes, at which
point they go through the process
again.
VARIABLE PRICING
Most firms use a fixed price
policy.
 Variable Pricing

The alternative has been variable

pricing, a form of first degree price
discrimination, characterized by
individual bargaining and negotiation,
and typically used for highly
differentiated high value items (like
real estate).
Two Variants of Variable
Pricing
1) Price Shading
 1) Price Shading

“…in which sales people are

given the authority to vary the
price by a certain amount or
percentage”.
2) Auctions
 2) Auctions

“…in which potential buyers have

the option of bidding on a
product and thereby varying the
price”.
PROFIT MAXIMIZATION
PRICE is a tool of PROFIT
MAXIMIZATION.
Profit Maximization is the process
by which a firm determines the
price and output level that returns
the greatest profit.
Two Approaches
1) The Total Revenue
 The Total Revenue

All the money that flows in

by virtue of sales is called
Total Revenue(TR).
 2) Marginal Revenue

The revenue which is added

by sales of an additional
item is called Marginal
Revenue (MR).
• FIXED COSTS
Fixed costs are incurred by the
business at any level of output.
These may include

• equipment maintenance,
• rent,
• wages,
• and general upkeep.
• VARIABLE COSTS
Variable costs change with the
level of output, increasing as
more product is generated.
a) Materials consumed during
production
b) Power
c) Transport
• SEMI VARIABLE COST
Fixed cost and variable cost,
combined, equal total cost.
Revenue is the total amount of
money that flows into the firm.
 It can be from any
source, including

• Product sales,
• Government Subsidies
• Venture Capital
• Personal Funds
 • Personal Funds

“Funds which have been

proviede by actors in the
business”.
AVERAGE COST
Average cost is defined as the
total cost divided by the amount
of units output.
For instance, if a firm produced 400
units at a cost of Rs.20000, the
average cost would be Rs.50.
MARGINAL COST
Marginal cost is defined as either
the change in cost or revenue as
each additional unit is produced.

For instance, taking the first

definition, if it costs a firm Rs.400
to produce 5 units and Rs.480 to
produce 6, the marginal cost of the
sixth unit is approximately Rs.80.
MC is usually lower than the AC
incurred in producing the product.
Total Cost-Total Revenue
Method
• Total Revenue-Total Cost
Approach

2) Marginal Cost-Marginal
Revenue Approach
Marginal Cost-Marginal
Revenue Method
Marginal Cost-Marginal
Revenue Method
MODES OF OPERATION
Economic Profit
 Economic Profit

….where MR is more than AC.

Normal Profit
 Normal Profit

….where MR=MC
Loss-Minimizing
Shutdown