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Costing & Pricing strategies


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A very simple yet precise description of costing and pricing,with examples of for both management and engineering students,specially for entrepreneurship and share.

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Costing & Pricing strategies

  2. 2. 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
  3. 3. 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 electricity,transport. • 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.
  4. 4. 2.Identifying costs 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
  5. 5. Costing Exercise  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 200.00 700.00 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.
  6. 6. 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?
  7. 7. 1.Premium Strategy 2.High-value Strategy 3.Super-value strategy 4.Overcharging strategy 5.Medium-value strategy 6.Good-value strategy 7.Rip-off strategy 8.False economy strategy 9.Economy strategy ProductQuality High Medium Low Price 4.Price-Quality strategy
  8. 8. 5.Setting pricing policy 1.Selecting the pricing objective 2.Determining demand 3.Estimating costs 4.Analyzing competitors’ costs,prices and offers 5.Selecting a pricing method 6.Selecting the final price
  9. 9. 6.Price-Reaction program • Responding to competitors’ price changes
  10. 10. 7.Break-Even Point • 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 the product/service. • 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)
  11. 11. 8.Pricing Strategies Pricing Strategies market skimming value pricing loss leader psychological pricing competitor pricing predatory pricing cost-plus pricing penetration pricing contribution pricing
  12. 12. 8.1.Penetration pricing • Price set to ‘penetrate the market’. • ‘Low’ price to secure high volumes. • Typical in mass market products – chocolate bars, food stuffs, household goods, etc. • Suitable for products with long anticipated life cycles. • May be useful if launching into a new market.
  13. 13. 8.2.Contribution pricing • Contribution = Selling Price – Variable (direct costs) • Prices set to ensure coverage of variable costs and a ‘contribution’ to the fixed costs • Similar in principle to marginal cost pricing • Break-even analysis might be useful in such circumstances
  14. 14. 8.3.Market skimming • 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.
  15. 15. 8.4.Value pricing • Price set in accordance with customer perceptions about the value of the product / service. • Examples include status products/exclusive products .
  16. 16. 8.5.Loss Leader • Goods/services deliberately sold below cost to encourage sales elsewhere. • 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.
  17. 17. 8.6.Psychological Pricing • 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.
  18. 18. 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.
  19. 19. 8.8.Destroyer/Predatory Pricing • 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 market
  20. 20. 8.9.Cost-plus Pricing • Calculation of the average cost (AC) plus a mark up. • AC = Total Cost/Output.
  21. 21. 9. Segmentation,Targeting & Positioning
  22. 22. 9.1.Segmentation • 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.
  23. 23. Market segmentation The need, • Cannot serve all customers of this universe. • No company has that kind of resources. • Customers • 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.
  24. 24. Segmenting Consumer Markets • Nation or country • State or region • City or metro size • Density • Climate • Geographic • Demographic • Psychographic • Behavioral
  25. 25. 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
  26. 26. Segmenting Consumer Markets • Age, race, gender • Income, education • Family size • Family life cycle • Occupation • Religion, nationality • Generation • Social class • Geographic • Demographic • Psychographic • Behavioral
  27. 27. • Lifestyle • Activities • Interests • Opinions • Personality • Core values • Geographic • Demographic • Psychographic • Behavioral Segmenting Consumer Markets
  28. 28. Segmenting Consumer Markets a. Lifestyle Nestle Classic - 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 .
  29. 29. b. Personality - Targeting consumer personality - Customer of Ford • Independent • Impulsive • Masculine • Alert to change • Self confident - Customers of Chevrolet • Conservative. • Thrifty • Prestige. • Conscious. • Avoid extremes
  30. 30. C. Values Tourists to Disneyland • Fun seekers • Families visit Tourists to Udayan child welfare unit at Kolkatta • Stay and meet poor children • Share thoughts • Donate
  31. 31. Segmenting Consumer Markets • Occasions • Benefits • User status • Usage rate • Loyalty status • Buyer-readiness • Attitude • Geographic • Demographic • Psychographic • Behavioral
  32. 32. 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.
  33. 33. 9.2. Targeting • 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 target groups. • Start with a single criteria and then expand to other bases.
  34. 34. 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.
  35. 35. 9.3. Positioning • 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.
  36. 36. “ For World Wide Web users who enjoy books, the is a retail bookseller that provides instant access to over 1.1 million books. Unlike traditional book retailers, provides a combination of extraordinary convenience, low prices, and comprehensive selection.”
  37. 37. 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.
  38. 38. eBay’s positioning: No matter what “it” is, you can find “it” on eBay! Positioning Example
  39. 39. “The best way to get and keep customers is to constatntly figure out how to give them more for less.” -Philip Kotler • 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 markets. Conclusion
  40. 40. 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. 3) 4) References
  41. 41. THANK YOU!