pricing policy and pricing methods

8/7/2019 Pricing Policy and Pricing Methods

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PRICING POLICY AND PRICINGPRICING POLICY AND PRICINGMETHODSMETHODS

Managerial decision involves two things one is formulation of pricespolicy and secondly setting up of prices which are remunerative toproducers.All producers want to achieve maximum profits. It is possible only whena producer sets a price greater than cost.The price theory points out that the equilibrium price is determined at apoint where MR=MC.Some economist like Hall disagree with the view point of profitmaximization because they feel it allows rival firms to enter into theindustry.Two factors which influence in determining prices internal factors andexternal factors. Internal factors are cost and management policy.External factors are elasticity of supply and demand , goodwill of thecompany the extent of competitions in the market the purchasingpower of the buyers and government policy towards prices.


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survival

Rate of growthand sales

maximization

Making of

money

Preventing competition Market

price


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To achieve a given rate of return for the entire product.To maintain price stability,To follow price policy which meets all market conditions.To prevent new firms from entering the industry and therebycapture market.Philip kotler has mentioned the following objective in hismarketing management book:-Market penetration.Market skimmingEarly cash recoverySatisfaction.


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Cost factor in pricing.Demand factor and psychology of the consumer.Competition factor.

ProfitsGovernment policy.Economic environment.Product stage in the life cycle.Competitors prices.Market position of firm.Ethical and social consideration.


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C ost-plus pricing.

Pricing for rate of return.

Marginal cost pricing.

Administered pricing

Going rate policy.


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Commonly adopted method by businessmen.He calculates the cost of production and adds a margin profit to it.The producer adds a certain profit which he considers fair to hiscost of production.Cost plus pricing is calculated by adding a certain percentage of profit to average total cost.There are three different methods of cost components used in costplus pricingActual cost.Expected cost.Standard cost.These three methods are available to calculate cost each companyfollows one of the methods. A firm may arrive at costs based onthree methods and then decide upon the one which suits the best.Each method gives a different figure and as such different pricesemerge.


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Ignores demand side problem.Fails to consider importance of competition.

Not useful when firms sell multi products.

Based on conventional accounting system.UsesIt helps in selling at fair and plausible prices.It is easy for all firms to calculate the price andsupply.It is economical.It helps in protecting price wars.

It is useful specially in public utility pricing.


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Cost plus prices led to controversy with regard to fair return .Businessmen argue that decent percent of return oninvestment is fair but some others do not accept conclusion.

Therefore the word fair is ambiguous.The price is determined based on predetermined target returnof on capital invested by the manufacturer.The price determined by planned rate of return on investmentwhich is converted into a percentage mark up.

The mark up percentage of profit is obtained by multiplyingcapital turnover by the goal return .Percentage markup=capital employed/total annualcost/planned rate of return.


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Marginal cost pricing refers to method of determining theprice on the basis of marginal or variable cost.The firm uses only those cost which are attributable to

output for specific period,The price so determined must cover the marginal costand total cost will have to be covered in the long run .Price based on marginal cost will be aggressive than onebased on total cost.When firm has a large unused capacity it should explorethe possibility of producing more and selling more.


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Prices are competitive.Marginal cost reflects more accurately the futuredistinct from present cost structure.This price permits the producer to have aggressive

policy.MC pricing is very useful over life cycle of aproduct.MC pricing is more effective than full cost pricing

because it helps in solving short run problems.Limitations :-The only difficulty in marginal cost pricing isignorance of the marginal cost technique.


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It is opposite of full cost pricing.

Going rate policy means adjusting its own pricepolicy to general price structure in the structure.

Going rate pricing means fixing a price for a firmsproduct which is same as the one which is thesame as the one which was already set by acompetitor firm for a similar product.It is also called acceptance price.


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H elps avoiding competition .It can be adopted even when cost are difficult tomeasure.It is economical.

It is suitable to avoid price hazards in oligopolymarket.Limitations :-It is useful for well established product.It is not possible to find out going rate price for newproduct.It is not suitable for those products whose marketing

is fading away.


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The government may adopt administered prices foressential goods.Administered prices are the prices of commodities

fixed by the government to prevent price escalationblack marketing and shortages in supply.Administered price denote pool price whileproduction units are given an assured price called

retention price.Administered prices are given on basis of cost of production and certain amount of profit.


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It protects interest of weaker sections .It mitigates inflation.It increases public revenue.

It ensures efficient allocation of scarce resources .It also helps in promoting egalitarian goal.Limitations :-This price discourages the production of certain goods.C hanges should be introduced when there change incost of production. It will lead to reduction in the supplyof certain goods.


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H igh skimming price:-This price refers to setting of highprice initially and slowly lowering the price over a time.When company introduces new product lot of advertisement takes place . The company may put

attractive packages. To cover all cost it introduces highprices.Penetration price:- this price involves setting a low initialprice to enter the market quickly and deeply to attract largenumber of buyers and win large market share.

Pricing over the life cycle of a product .Five stages ( Introduction, Growth, Maturity,Saturation , Decline.)


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Two prices are prevailing for a product. That is oneprice is given by the market forces anotherdetermined by the govt. for example sugar sold

in open market and sold in ration shop,Transfer pricing is associated with MN C s. Transfer

pricing refers to intra-pricing the pricing of products transferred from particular or salesunit of multinational firm in one country toanother unit of firm in another nation.


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Under cost based pricing strategy the firm lookstowards marginal cost and puts a mark-up forthe profit and determines the prices.

Under the demand based pricing strategymarket condition and demand behaviour playsan important role. When demand condition

increases the firm can increase its price andget more profits. When demand shrinks prices,prices falls and loss in profit is the result.


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It means raising the price of a product when demandis the highest. It is usually used by public utilities tomeet the demand for their services such aselectricity telephone etc. this is done to ensure thecapacity meets the demand and the excess demandis waived off due to high prices.Limit price is set up by sellers to avoid the entry of new firms into the market because it would be

unprofitable if new firms enter the market. It is illegalform of pricing which is adopted by monopolistic firm.


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Geographical pricing:- It involves the company decides to price itsproducts based on different locations and countries.Price discounts and allowances:- Most companies modify their prices toreward customers for acts as early payments, volume of purchases andoff season buying.Promotional pricing:- under certain circumstances companies, willtemporarily price their products below the list price and sometimes evenbelow cost. Promotional pring takes several forms:-Loss leader pricing:- supermarkets drop their prices on well knownbrands to stimulate the consumers.Special event pricing:- establishing special prices for certain seasons.C ash rebates:-consumers are offered cash rebates to encourage theirpurchasing of product.

Low interest financing:- the company does not lower the price but offerscustomers lower interest financing.Psychological pricing:- putting high price initially latter reducing theprice.Warranty and service contracts:- the company can promote sales byadding free warranty offer or service contract


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Discriminatory pricing:- when company sellsthe product or service at two or more pricesthat do not reflect proportional difference incost . It takes several forms:-C

ustomers segment pricing Product form pricing Image pricing Location pricing Time pricing.Product mix pricing:- the firm sets pricesthat maximizes profit on total product mix.


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There multiple objectives of firm. They are asfollowsProfits.Sales maximization.Increasing market shares.Building good reputation.

Financial stability and liquidity.Job satisfaction.Leisure and peace mind etc.


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In many goals profit is accorded a highpriority by a business firms . But in practicefirms rarely wish to maximize profits. This isdue to many reasons such as fear of attracting rival firms, fear of provoking governments anger on egalitarian grounds

and perhaps also to avoid nationalizationand to maintain good relation.


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Sales maximization is an alternative goal toprofit maximization. Baumol has developedstatic and dynamic models to formulate thetheory of sales maximization.

Static modelAssumptions :-A firms decision is limited to single period.Total sales maximization is a alternative toprofit maximization.C onventional cost and revenue curves areassumed.


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Four models are given with this assumptions.Single product model without advertisement;-under this model the firm maximizes its TR bysetting MR equal to zero.

Thus profit maximizing firm follows the principlewhere MR=M C whereas for sales revenuemaximization MR=0.Single product model with advertisement.:- in

this model it is assumed that advertisementincreases the sales and total cost areindependent of advertisement expenditure .Firm decides on optimum advertisement by

examining its impact on sales revenue.


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Baumol says managers are more concernedwith sales revenue than profit. This isbecause

Managers salaries are tied up with sales. Larger the sales firms expand.

Increasing sales enables the firm to capturemore market and earn business reputation.

Baumol further states that firms give priority toearn minimum level of profit. Once this isachieved it will maximize its sales.

pricing policy and pricing methods

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