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PricingAn introduction Pricing method or strategy is the route taken by the firm in fixing the price. The method/strategy must be appropriate for achieving the desired pricing objectives.
Pricing methods1. Cost Based PricingTypes of cost based pricing Mark-Up Pricing(cost plus pricing) Absorption cost pricing (full cost pricing) Target rate of return pricing Marginal cost pricing
Mark-up pricing• The selling price is fixed by adding Mark-up or Margin to its cost.• Usually used by: Distributers, Marketing firms etc..• Slower the turnaround of the product larger the margin and vice versa.Example:Supplyco.
Absorption cost pricing• Mainly used by manufacturing firms.• It uses standard costing techniques.• It includes : – Fixed cost – Variable cost + PAROFIT – Selling and administering cost – Advertisement cost• It is also known as full cost pricing.
Target rate of return pricing• Similar to Absorption cost pricing.• The difference is in fixing the profit margin.• The profit margin/ mark up is fixed by considering the ROI.• Firm will have return objectives, like 5% of invested capital, or 10% of sales revenue.• Then you arrange your price structure so as to achieve these target rates of return.• Market leaders or monopolists uses this pricing strategy.
Marginal Cost Pricing• It takes cost and demand into consideration while fixing the price.• It aims at maximizing contribution towards fixed cost.• It gives flexibility to recover the fixed cost depending on the market condition.• It also gives flexibility in recovering a large portion of cost from certain segment and a small portion from some other segment.
Break-even concept Revenue / Cost (Rs) Total Cost B Variable cost Fixed Cost Out Put
Pricing methods2. Demand Based Pricing The pricing decision is also depending on Demand and supply of the commodity. More realistic .Types of cost based pricing are:• What the traffic can bear pricing• Skimming pricing• Penetration pricing
“What the traffic can bear”• The seller sets the maximum price the buyers are willing to pay in giver circumstances.• It will bring a high profit during this period.• Chance of error in judgment are very high.• Can be used in the following conditions. – Shortage of goods – Monopoly – Oligopoly
Skimming Pricing• Initially the products will be introduced in a high price and subsequently settle down for a lower price.• Example: Mobile Phones, Televisions etc.. Most of the electronic items.
Penetration pricing• Initially introduced at a lower price and increases its price as its demand in the market increases.• Good to capture new market.• Opposite of skimming.• Keep the product out of competition for longer time.• Example: DTH Services, Magazines, TV channels etc..
3. Competition Oriented Pricing• It need not mean that pricing the commodity matching its competitors, it can also be the following: – Premium pricing – Discounted Pricing – Parity Pricing/going rate pricing
4.Product line pricing• The products in a given product line are related to each other.• The manufacturing cost of these products also will not be much different.• The need not price the product optimally but it may price the product line optimally.• It is mainly indented to get optimum profit from the line.Example: Pulsar 150, 180, 200, 220
5.Tender pricing• Industrial products• The customers go by competitive bidding through sealed tenders.• The seller can only get the best possible price.• He should thoroughly analyze the competitors.
6. Affordability based Pricing• Essential commodities• Social welfare pricing• The idea of this pricing is to make the product available to the targeted population at an affordable rate.• Items usually distributed through public distribution system.• Subsidies may be involved• Example: Chick shampoo , Akash, medicine etc.
7. Differentiated pricing• Different price for the same product in different location. (SanDisk cruzer balde Pen-drive, Petrol )• The price difference may also be made in the case of customer class.• Volume of purchase. ( Offer packs Lux soap, Colgate value packs etc)