Managerial Economics - Different types of pricing policies that companies can follow

1. Pricing Policies
DR. P. SUGANTHI,
ASSISTANT PROFESSOR,
DEPARTMENT OF MANAGEMENT STUDIES,
V.V.VANNIAPERUMAL COLLEGE FOR WOMEN,
VIRUDHUNAGAR

2. Obectives of Pricing policy
• Price-Profit Satisfaction
• Sales Maximisation and Growth
• Making Money
• Preventing Competition
• Market Share
• Survival
• Market Penetration
• Marketing Skimming
• Early Cash Recovery
• Satisfactory Rate of Return

3. Factors determining
pricing policy
• Cost Data in Pricing
• Demand Factor in Pricing
• Consumer Psychology in Pricing
• Competition Factor in Pricing
• Profit Factor in Pricing
• Government Policy in Pricing

4. TYPES OF PRICING

5. COST-PLUS PRICING
1

6. COST PLUS PRICING
◎ P = AVC + GPM
◎ AVC= Average Variable Cost
◎ GPM = AFC+ NPM
◎ P = AVC + AFC + NPM
◎ P = ATC + NPM

7. COST PLUS PRICING - Advantages
◎ Easy to understand and implement
◎ Fufills profit maximisation
objective
◎ Economical in terms of time,
energy and expenses
◎ Consumers may perceive as a fair
method
◎ Suitable in cases of price
leadership

8. COST PLUS PRICING - Disadvantages
◎ Only supply side considered and
demand side ignored
◎ Competition not considered
◎ Not applicable for perishable
products
◎ Mark – up fixation is arbitrary

9. MARGINAL COST
(Incremental) PRICING
2

10. MARGINAL COST PRICING
◎ Incremental cost of
production
◎ Increase in variable cost due
to additional lots of
production
◎ Short run concept
◎ (In the long run, only full
cost pricing will be
applicable)

11. MARGINAL COST PRICING -
Advantages
◎ Helps to face competition
◎ Pricing over the life cycle of the
product (BSNL offers for Landline)
◎ Can be used in multi-product firm
where same infrastructure is
shared among products
◎ It is penetrative price

12. MARGINAL COST PRICING -
Disadvantages
◎ Can be used only when entering
into the market
◎ In case of unutilised capacity,
only marginal cost will be
recovered

13. PRODUCT LIFE CYCLE
PRICING
3

14. PRODUCT LIFE CYCLE PRICING
◎ Different pricing for
introduction, maturity stages
◎ Pioneering stage –
• Skimming
• Penetration
◎ Maturity stage

15. PRODUCT LINE
(Multiproduct) PRICING
4

16. PRODUCT LINE PRICING
◎ Situations of Demand,
production, cost and capacity
relationships
◎ Pricing of substitutes
￮ Same Margin or mark-up pricing
￮ Optimum price - Objective –
maximisation of firm’s revenue

17. PRODUCT LINE PRICING
◎ Pricing of Joint products
￮ Fixed relationship: One product
price can be lowered and profit
can be earned by increasing the
price of the other complementary
product
￮ Varying relationship: Total cost
is apportioned to each product

18. GOING RATE PRICING
5

19. GOING RATE PRICING CONCEPT
◎ Prevailing pricing structure in
the industry is examined and a
price is fixed.
◎ When cost of production is
difficult to be determined,
this can be followed
◎ Cost of production to be
adjusted to this expected price
for profit realisation

20. Administered and Dual
PRICING
6

21. ADMINISTERED PRICING
◎ Fixed by a statute of the
Government
◎ For essential commodities
◎ Disadvantage- does not
consider increase in input
cost or cost of production,
does not attract much
investment

22. DUAL PRICING
◎ A portion procured by Govt
and supplied at administered
pricing
◎ Balance supplied at market
price by the producers

23. To Remember:
◎Incremental and time
perspective
◎Consumer and producer surplus
◎Marginal Cost
◎Long run costs
◎Types of pricing
◎Objectives and factors
determining pricing policy