E’ship is a commercial proposition.it is a profit oriented activity.Every entrprnr tries to maximise profit.Entrprnrs always compare the cost incurred on the production of a given output and the sales revenue earned by selling that output bcoz profit is derived by deducting the cost of production from the sales revenue.
A realistic and comprehensive knowledge on costing and pricing is required to build the financial management capabilities of entrepreneurs. This will help in running the enterprise successfully and enable one to give due importance to costing and pricing.
To be able to project costs at various levels of production we need to understand how each cost will behave in relation to business activity – will it increase, decrease or remain static? The nature of costs can be divided into three categories: fixed, variable and semi-variable.
Direct material cost: eg: television:wooden/fibre moulded case,all electrical and electronic components Direct labour costs: eg:carpenter :wages for making the table. Other: eg:a painter may hire a ladder..which an entrprnr does not purchase and are not used daily bt has to hire for the fulfilment of the job.
Six step procedure
BREAK EVEN POINT BEP is one of the important profitability indicator and describes the point where the entrpnr can recover all the costs and starts earning profit.At the BEP,there are no lsss and no profit.In other words,at BEP,the sales revenue is equal to the total cost of production.
USES OF BEP 1.Higher BEP indicates higher risks,because in high BEP ,the fixed costs tend to be high.If the entrepreneur could not generate a big volume of sales revenue,an entrepreneur incurs losses.Such projects are risky.BEP helps in the comparision of the projects. 2.In the high risk projects,invest is always at stake.While making investment decisions,an entrepreneur always considers the BEP. 3.As BEP indicates a no-profit-no-loss position,it is used as a technique for determining the price of the product/service. 4.When an entrepreneur plans to produce many products ,BEP analysis guides him as to how profitable it is to manufacture the product.He can take the decide whether to manufacture the product or to give that work on the job workbasis or wheteher to buy that product from outside. 5.To meet the increasing demand situation,BEP guides the entrepreneur,whether it is advisable to invest in more resources or whether he should try to increase the production with the available resources. 6.BEP guides the entrepreneur in decision making.
Many are predicting a firesale in laptops as supply exceeds demand Plasma screens: Currently at high prices but for how long?
The percentage added to the total cost is called as mark up.
Positioning: The place the product occupies in consumers’ minds relative to competing products. Typically defined by consumers on the basis of important attributes. Involves implanting the brand’s unique benefits and differentiation in the customer’s mind. Positioning maps that plot perceptions of brands are commonly used.
The task of positioning is to deliver a central idea about a company or an offering to the target market.Positioning simplifies what we think of the entity.Differentiation goes beyond positioning to spin a complex web of differences characterizing that entity.We define differentiation as the process of adding a set of meaningful and valuable differences to distinguish the company’s offering from competitors’ offerings. CONSIDER IKEA.
A difference will be stronger to the extent that it satisfies the following criteria: Important: The difference delivers a highly valued benefit to a sufficient number of buyers. Distinctive: The difference is delivered in a distinctive way. Superior: The difference is superior to other ways of obtaining the benefit. Preemptive: The difference cannot be easily copied by competitors. Affordable: The buyer can afford to pay for the difference. Profitable: The company will find it profitable to introduce the difference.
6. Price-Reaction program
7. Break-even point
8. Pricing Strategies
9. Segmentation,Targeting & Positioning
1. Nature of costs
2. Identifying costs
3. Why is pricing important?
4. Price-Quality strategy
5. Setting pricing policy
TABLE OF CONTENTS
1.Nature of costs
• Fixed Costs are those costs that do not vary with the level of business activity. These are costs that you
must pay irrespective of whether you make or sell one unit or 1,000 units.
Examples include rent, depreciation, lease costs, loan repayments and insurance.
• Variable Costs vary directly with the level of business activity or sales. Your variable costs are therefore
much higher if you sell or make 1,000 extra units.
Examples include the purchase of stock, raw material, manufacturing labour,fuel and
• Semi-variable Costs vary with the level of business activity but not in direct proportion.
An example would be a telephone bill that would have a fixed component (i.e. rental charge) and a
variable component (i.e. charge per call). If you business relied on telephone sales, a busy period
would see an increase in your telephone bill but not in direct proportion to the increase in sales.
The first step in COSTING is to identify the type of costs that have gone into the article manufactured, the stock item sold or
the service provided. To do this costs are classified into direct costs and indirect costs
Direct costs include those costs which can be easily identifiable with the production of the product or service.Directly
identifiable costs are:
• Direct material costs
• Direct labour costs
• Other direct costs specially incurred for the product
Indirect costs represent all those costs which cannot be directly and readily identified with the product and
services.These costs are also described as overhead costs.
Important examples of indirect costs are:
• Electricity and water bills
• Fuel charges
• Stationary and printing
• Legal charges
• Interest on loans
Mr. Ramesh is processing mangoes for a pickles manufacturer, who subcontracts the work, when he has
orders for processing less than 5000 Kgs of mangoes. The pickles manufacturer provides raw mangoes, but all
other inputs and expenses are the responsibility of Mr. Ramesh. To process 200 Kgs of mangoes, he needs
spices and oil costing Rs.400/- and fuel costing Rs.100/-. In addition, he pays Rs.200/- to workers who work
for eight hours, processing 2000 Kgs of mangoes. Calculate the price that he must quote per Kg of processing,
to the pickle manufacturer if he decides to earn a minimum of Rs.20 per Kg for himself.
The correct solution is:
Cost of processing 200 Kgs of Mangoes Rs. i) Spices and Oil 400.00
ii) Fuel 100.00
iii) Labour 200.00
He wants to earn Rs.20/- per Kg. Hence for 200 Kgs targeted earning is Rs.4000/- (i.e. 200 × 20).
Therefore, he must quote Rs.700.00 + Rs.4000 = Rs.4700/- for 200 Kgs i.e. Rs.23.50/- per Kg.
In a company with average economics,
• 1% increase in volume = 3.3% increase in profit
• 1% increase in price = 11.1% increase in profit
• Improvements in price typically have 3-4 times the effect on profit as proportionate
increases in volume.
3.Why is Pricing Important?
5.Setting pricing policy
the final price
• Responding to competitors’ price changes
• Profitability indicator
• Describes the point where the entrepreneur can recover all
the costs and starts earning profit.At the BEP,there are no
losses and no profit.In other words,at BEP,the sales
revenue is equal to the total cost of production.
Uses of BEP
• BEP helps in the comparision of the projects.
• While making investment decisions,an entrepreneur
always considers the BEP.
• it is used as a technique for determining the price of
• BEP guides the entrepreneur in decision making.
• Break even point(in unit) = Fixed cost / (Unit price-Variable unit cost)
• Break even point(in Rs.) = Fixed cost / (Unit price-Variable unit cost*Units)
• Price set to ‘penetrate the market’.
• ‘Low’ price to secure high volumes.
• Typical in mass market products – chocolate bars, food stuffs, household
• Suitable for products with long anticipated life cycles.
• May be useful if launching into a new market.
• Contribution = Selling Price – Variable (direct costs)
• Prices set to ensure coverage of variable costs and a ‘contribution’ to the
• Similar in principle to marginal cost pricing
• Break-even analysis might be useful in such circumstances
• High price, Low volumes.
• Skim the profit from the market.
• Suitable for products that have short life cycles or which will face
competition at some point in the future (e.g. after a patent runs out).
• Examples include: Playstation, jewellery, digital technology, new DVDs, etc.
• Price set in accordance with customer perceptions about the value of the
product / service.
• Examples include status products/exclusive products .
• Goods/services deliberately sold below cost to encourage sales
• Typical in supermarkets, e.g. at Diwali, selling sweets at low cost in the
hope that people will be attracted to the store and buy other things.
• Purchases of other items more than covers ‘loss’ on item sold.
• e.g. ‘Free’ mobile phone when taking on contract package.
• Used to play on consumer perceptions
• Classic example - $9.99 instead of $10.00
• Links with value pricing-high value goods priced according to what
customers THINK should be the price.
8.7.Competitor Pricing (Going Rate)
• In case of a competitor pricing, rivals have difficulty in competing on price – too
high and they lose market share, too low and the price leader would match price
and force smaller rival out of market
• In this strategy, we are compelled to follow pricing leads of rivals especially
where those rivals have a clear dominance of market share
• Where competition is limited, ‘going rate’ pricing may be applicable – banks,
petrol, supermarkets, electrical goods – find very similar prices in all outlets.
• Deliberate price cutting or offer of ‘free gifts/products’ to
force rivals (normally smaller and weaker) out of business
or prevent new entrants.
• Anti-competitive and illegal if it can be proved.
Microsoft – have been accused of
predatory pricing strategies in offering
‘free’ software as part of their operating
system – Internet Explorer and Windows
Media Player - forcing competitors like
Netscape and Real Player out of the
• Calculation of the average cost (AC) plus a mark up.
• AC = Total Cost/Output.
• GET TO KNOW YOUR CUSTOMER!
• Segmentation is the process of understanding why people buy products
and services like yours, which of those people you can best satisfy and
what you can do to make your product simply irresistible to them.
• Cannot serve all customers of this universe.
• No company has that kind of resources.
• Too numerous
• Diverse in their buying requirement
• Need to identify the market segments that it can serve more effectively.
• The universe is heterogeneous.
• Divide the universe into market segments, where buying or need
requirements is same i.e. homogenous.
• Attack one or few market segments.
• This is market targeting.
Segmenting Consumer Markets
• Nation or country
• State or region
• City or metro size
Example of Geographic criteria,
Ford Ikon in India
1. International car
2. Changes for India
1. Higher suspension
2. Larger size air conditioner, higher ambient temperature
3. Lower average speeds
4. Handle adulterated fuel
Segmenting Consumer Markets
Segmenting Consumer Markets
• Age, race, gender
• Income, education
• Family size
• Family life cycle
• Social class
Segmenting Consumer Markets
- Pleasure of making coffee
Adding sugar, coffee in hot milk.
Nestle “3 in 1
- Office goers.
- Paucity of time .
- Espresso feeling .
- Milk, sugar,coffee premixed .
- Targeting consumer personality
- Customer of Ford
• Alert to change
• Self confident
- Customers of Chevrolet
• Avoid extremes
Tourists to Disneyland
• Fun seekers
• Families visit
Tourists to Udayan child welfare unit at Kolkatta
• Stay and meet poor children
• Share thoughts
Segmenting Consumer Markets
• User status
• Usage rate
• Loyalty status
The fundamental philosophy behind customer segmentation is that customers will be more inclined to
buy something or take action when doing so addresses their speciﬁc needs.
• INCREASE RELEVANCE!
• Target Market - Consists of a set of buyers who share common needs or
characteristics that the company decides to serve.
• Best to use multiple approaches in order to identify smaller, better-deﬁned
• Start with a single criteria and then expand to other bases.
Market Targeting Strategies
• Evaluating and selecting market segments requires assessing the segment’s overall
attractiveness in light of company’s objectives and resources.
• Five patterns of target market selection can then be considered.
• HOW DO YOU WANT TO BE PERCEIVED!
• Positioning is the act of designing the company’s offering and image to
occupy a distinctive place in the mind of the target market.
Developing the positioning strategy:
1. Understanding target consumers.
2. Analyzing Market/Competition.
3. Deﬁning Competitive Advantage(s).
4. Identifying relevant attributes.
5. Communicating and Delivering Chosen position.
“ For World Wide Web users who enjoy books, the Amazon.com is a retail bookseller
that provides instant access to over 1.1 million books. Unlike traditional book
retailers, Amazon.com provides a combination of extraordinary convenience, low
prices, and comprehensive selection.”
A good positioning helps
guide marketing strategy by
clarifying the brand’s
essence,what goals it helps the
consumer achieve,and how it
does so in a unique way.
No matter what “it” is, you
can find “it” on eBay!
“The best way to get and keep customers is to constatntly figure out how to give them more
• Pricing is a critical element in any company’s marketing plan, because it directly affects
revenue and profit goals.
• To effectively design and manage pricing strategies, marketers must consider costs as well as
the perceptions of customers and reactions of competitors-especially in highly competitive
1) Philip Kotler, Philip.; Kevin Lane Keller (2006). Marketing Management,
12th ed.Pearson Prentice Hall. ISBN 0-13-145757-8.
2) Entrepreneurship Management-Dr.Aruna Kaulgud.