1.
BY
KRISHNAKUMAR C S
DAV-BHEL SCHOOL, RANIPET

2.
METHODS OF PRICING
Demand-oriented
pricing
Cost-oriented pricing
Competition-oriented
pricing or market driven
pricing
Value- based pricing

3.
1. DEMAND ORIENTED PRICING
• When price is decided by the demand for a
commodity, it is called demand oriented pricing.
• Price and quantity demanded are inversely related.
More is demanded at a lower price and less is
demanded at a higher price.
• Equilibrium price is determined at a point where
quantity demanded and supplied are equal.
• If the demand for a product increases, its price will
also increase.
• If the supply of a product increases, price will fall.

4.
PERCEIVED VALUE PRICING
• In Perceived-Value Pricing method, a firm sets the price of
a product by considering what product image a customer
carries in his mind and how much he is willing to pay for it.
• In other words, pricing a product on the basis of what the
customer is ready to pay for it, is called as a Perceived-
value pricing.
• The perceived value is made up of several elements such as
buyer’s experience with the product, service support,
warranty quality, customer support, supplier’s reputation,
trustworthiness, etc.

5.
DIFFERENTIAL PRICING
• Charging different prices in different situations for
the same product is called differential pricing.
• Time of Purchase: The taxi charges different prices
during day time and night time. Hotels charge
different amount for different seasons.
• Location: Same product may be sold at different
prices in different locations. For example:
• Product version: The same product may come in
different versions. Each version will be priced
differently. For example: A book with a leather
cover will be priced higher than a book with
ordinary cover.

6.
• The Customer: In a train there are different types of
passenger coaches. First class coaches provide more
comforts to the passengers. So, the ticket charge is
more than that of second class coaches.
• Bargaining Ability: Those customers who have high
bargaining power may get the product at a lower
price than the others.
• Level of knowledge: Level of knowledge about
product features also affect the price of a product.
• Availability of a product: If there are many
customers for a single piece of a product, the one
who is willing to pay the highest price will get it.

7.
PRICE SKIMMING
• It refers to charging a high price for a new product
and gradually reducing the price as competitors
enter the market.
• It is followed in the case of text books. Normally
price is high for the first edition and the price falls
for the successive editions.
• The high price in the beginning is experimental and
by gradually reducing it the firm can find the right
price.

8.
• Skimming pricing policy is very effective under the
following conditions:
• Where the demand is inelastic, customers know
very little about the product and there are very few
competitors.
• Where the market can be broken down in to
segments with different price elasticity of demand.
• Where little is known about price elasticity oif
demand.
• Where there is minimum risk and one can move up
in the prices.
• Where the firm is making an effort to up market its
product by taking steps to improve quality, service
and sales promotion.

9.
• PENETRATION PRICING
• Under this policy, very low price is charged for a
new product in the initial days.
• As days goes on and the product gets accepted by
the customers, price can be increased gradually.
• This policy will help the product to win over its
competitors and get good market share.
• Jio successfully used this policy to become a market
leader.

10.
• The conditions that favour penetration policy.
• If the price elasticity of demand is high, the firm can
attract customers to new product by charging low
price.
• If the firm can sell large volumes by charging low
price.
• If there is tough competition in the market, the firm
can attract customers with low price.
• If the firm can increase its production as demand
increases due to low price.
• If market segments are not there so that high price
may be accepted.
• If substitute product is available in the market.

11.
• ADVANTAGES OF DEMAND BASED PRICING:
• The pricing based on demand takes into account
customer’s price elasticity and
• preferences
• It penalizes inefficiency, optimizes product mix
and facilitates new product pricing.
• It also obviates the difficulty of joint cost
allocation.
• it increases firm’s ability to optimize prices using
diagrams that predict ideal prices.

12.
DISADVANTAGES OF DEMAND BASED
PRICING:
• The demand based price does not ensure
competitive harmony.
• It is not safe from a company’s standpoint.

13.
COST-ORIENTED PRICING
• It is a method of fixing prices on the basis of
production cost. The price will serve profit objective
of the firm also.
Types of Cost Oriented Pricing
Cost plus Pricing Markup Pricing Break-even Pricing

14.
• a. Cost plus Pricing
• Under this method, the cost of production of the
commodity is estimated and profit is added to it to
calculate the price.
• Selling Price = Unit total cost + Desired unit profit
• Cost plus pricing is advantageous as it tells firm
what prices competitors are charging in the market,
but it ignores replacement costs issue.

15.
Markup Pricing
• The Mark-up pricing is the method of adding a certain
percentage of a markup to the cost of the product to
determine the selling price.
• Markup is the difference between the cost of a good or
service and its selling price.
• It is generally done by the retailers. They get product
from the whole sale shop. Then add a certain
percentage of the cost as mark up to the actual cost of
the product to calculate the price.

16.
Break-even Pricing
• If the price of the product is equal to its cost of
production, it is called Break-even pricing. There is
no profit.
Break even quantity can be calculated by the
following formula:
• BEP =
𝑻𝒐𝒕𝒂𝒍 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕
𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕−Variable cost per unit.
• The firm reaches equilibrium when total revenue is
equal to total cost.

17.
• If Fixed expenses in a production unit are Rs. 54,000,
variable cost per unit is Rs. 15and selling price per
unit is Rs.20; find out BEP quantity. What should be
the selling price if Break-even output is brought
down to 6,000 units?
• BEP =
𝑻𝒐𝒕𝒂𝒍 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕
𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕−Variable cost per unit.
• =
54000
20−15
= 10800

18.
• Selling price if Break-even output is brought down
to 6,000 units?
• BEP =
𝑻𝒐𝒕𝒂𝒍 𝑭𝒊𝒙𝒆𝒅 𝑪𝒐𝒔𝒕
𝑺𝒆𝒍𝒍𝒊𝒏𝒈 𝑷𝒓𝒊𝒄𝒆 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕−Variable cost per unit.
Contribution per unit = Selling Price – Variable Cost
6000 =
𝟓𝟒𝟎𝟎𝟎
𝒄𝒐𝒏𝒕𝒓𝒊𝒃𝒖𝒕𝒊𝒐𝒏 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕
Contribution per unit =
54000
6000
= 9
9 = Selling Price – 15
Selling Price = 15 + 9 = 24

19.
• Competition-oriented pricing or market driven
pricing.
• Competitive pricing is setting the price of a product
or service based on what other firms are charging.
• It is generally done in perfectly competitive markets
where products are homogeneous and buyers and
sellers are well informed.
• The seller cannot increase his price.
• The advantage of competitive pricing is that it
avoids price competition.
• Disadvantage is that this pricing method may only
cover production costs, resulting in low profits to
the firm.

20.
Common methods of Competition-oriented
pricing or market driven pricing .
a) Going rate pricing
• Fixing the price as per the market trend is called
going rate pricing.
• It is generally followed in the market where the
products are similar.
• It is not necessary that the price should be same as
the competitor or the industry leader.
• It could be little higher or little lower than the price
of industry leader.
• As the industry leader changes the price, the firm
can increase or decrease the price accordingly

21.
• b) Sealed Bid pricing
• Sealed-bid pricing is followed in construction or
contract business.
• It is also a competitive pricing method.
• Here, price is selected on the basis of sealed bids
(quotation or estimated price) for the jobs.
• The firm sets its price on expectations of how
competitors will price the product.
• The firm wants to win the contract requires
submitting the lower price than competitors.
• However, costs and profits are not totally ignored.
The firm cannot set price below the costs.
• It is called as tender pricing also.

22.
• Competitions based pricing methods are generally
followed by the managers when:
• a. They believe that strong competitors are better
and able to select appropriate prices, so they
“follow the leader.”
• b. Retaliatory price changes are likely beyond given
range, and price changes by competitors have a
substantial effect on company sales.
• c. Costs, demand and other factors that affect sales
and profit are stable enough to make it possible to
rely on following general industry pricing trends

23.
c) Discriminatory Pricing
• It is a method of selling the same product at two or
more prices.
• i) Discrimination on the basis of customer segment
– the product / service is sold at different prices to
different customer groups, e.g. Indian Railway
charges lower fare for students.
• ii) Discrimination on the basis of product form –
different version of the same product are sold at
different places. Based on image differences, e.g. a
company may sell two varieties of a bathing soap
Rs.2 and Rs 50 respectively, through the difference
in their cost of Rs 10 only.

24.
• iii) Locational discrimination – the product is sold at
different prices at two places even though the cost is
the same at both the places, e.g. a cinema theatre
charges different prices for seats close to the screen
and higher for the seats located far off ie different for
ground floor and balcony seats.
• iv) Time discrimination – Prices differ according to the
season or time of the day. Public utilities like taxi charge
higher rate at night. Similarly, 5 star hotels charge a
• lower price for their rooms during off-season
• v) Image discrimination – the same product is priced at
different levels on the basis of difference in image, e.g.
a perfume company may price its perfume @ 500 Rs
each in an ordinary bottle and @ 1000Rs in a fancy
bottle with a different name and image.

25.
• Value-based pricing is a strategy of setting prices
primarily based on a consumer's perceived value of
the product or service in question.
• Value pricing is customer-focused pricing, meaning
companies base their pricing on how much the
customer believes a product is worth.
• Companies that offer unique or highly valuable
products and features are better positioned to take
advantage of the value pricing model than
companies which chiefly sell commoditized items.
• For example, the products sold at ‘Fab-India’ or
‘Forest Essentials’ cosmetics are considered as
premium products by the customers and so are
priced high.

26.
• Value-based pricing strategy can be
advantageous because it goes inside the mind
of the intended consumer to predict what the
consumer would be willing to pay for a
product and so helps firm in setting price.

27.
• The major pricing policies followed by business
enterprises are discussed below:
• 1. Competitive Pricing
• 2. Penetration Pricing
• 3. One Price versus Variable Pricing
• 4. Market Skimming Pricing
• 5. Discrimination or Dual Pricing
• 6. Premium Pricing
• 7. Leader Pricing
• 8. Psychological Pricing
• 9. Price Lining
• 10. Resale Price Maintenance
• 11. Everyday low pricing
• 12. Team pricing