Pricing Decisions - Introduction to Pricing, Pricing methods, Pricing procedure and pricing strategies

1. Pricing Decisions
Dr. R. Vara Prasad

2. Definition
 Price is the amount of money and or other item with utility
needed to acquire a product.
 “In the narrowest sense, price is the amount of money
charged for a product or service” Philip Kotler and Gary
Armstrong
 Price is the sum of all values that consumers exchange for
the benefits of having or using the product or service.
 “Price is a monetary summary of the conditions which give
value to a ware”Walton Hamilton
 Price is the amount of money that is paid for a product
or a service

3. Meaning
 Pricing is a function of determining product
value in terms of money. It is managerial
process which includes the objectives of
pricing, available price flexibilities, factors
influencing price determination, monetary
value of product, and determination
implementation governance of the pricing
policies and strategies.

4. Objectives of
Pricing
 Profit Oriented Objectives
 To Maximize Profits
 To skim the cream price
 To achieve a target return on sales
 To achieve a target return on investment
 To earn reasonable profits
 To minimize losses
 Sales Oriented Objectives
 To maximize sales volume
 To maintain market share
 To maximize market share
 To maximize number of customer
 Status-quo Oriented Objectives
 To face competitive situation
 To ensure existence
 Stabilizing prices
 To face non-price competition.

5. Factors
Influencing
Price
 The following factors may be considered while taking a decision for pricing a
product:
 Product Characteristics
 Life cycle of the product
 Perishability of the product
 Product substitution
 Postponement of the product demand
 Cost of the product
 Fixed cost
 Variable cost
 Incremental cost
 Nature of the demand of a product
Nature of the demand can be divided as follows
 Perfectly elastic demand
 Excessive elastic demand
 Elastic demand
 Inelastic demand
 Perfectly inelastic demand

6.  Levels of Distribution
 Direct Distribution
 Indirect distribution
 Level of Competition
 Business Goals
 Advertising and Sales Promotion Efforts
 Trade Customers
 Government Policies
 Buyers Characteristics
Factors
Influencing
Price

7. Methods of
Pricing
There are several methods of pricing. Each of
them is appropriate for achieving a particular
pricing objectives.
• Cost Based Pricing
• Demand/Market based pricing
• Competition Oriented Pricing
• Product Line Pricing
• Tender Pricing
• Affordability based Pricing
• Differentiated Pricing

8. Methods of
Pricing
Cost Based
Pricing
Markup pricing
or Cost Plus
Pricing
Absorption Cost
Pricing
Rate of Return
Pricing
Marginal Cost
Pricing

9. Markup pricing
orCost Plus
Pricing and
Absorption
Cost Pricing
 Markup pricing or Cost Plus Pricing
 Markup pricing refers to the pricing method in which the selling price of
the product is fixed by adding a margin to the cost price.The mark ups
vary depending upon nature of products and markets.
 According to this method selling price is calculated as
𝑆. 𝑃 =
𝐴𝑣𝑒𝑟𝑎𝑔𝑒 𝐶𝑜𝑠𝑡 𝑃𝑒𝑟 𝑈𝑛𝑖𝑡
1 − 𝐷𝑒𝑠𝑖𝑟𝑒𝑑 𝑀𝑎𝑟𝑘 𝑈𝑝 𝑃𝑟𝑖𝑐𝑖𝑛𝑔
Markup Pricing or Cost plus pricing is a cost-based method for setting the
prices of goods and services. Under this approach, you add together the
direct material cost, direct labor cost, and overhead costs for a product, and
add to it a markup percentage (to create a profit margin) in order to derive
the price of the product.

10. Markup Pricing
 Advantages:
 Company knows exactly the amount of expenditure that has incurred on
making a product
 It is the simplest method to decide the price for a product
 Since company is using its own data for deciding cost which makes it easier
for a company to evaluate the reasons for escalations
 Disadvantages
 This method does not take into account the future demand for a product
 It also does not taken into account the competitor actions and its effects on
pricing of the product
 It can result in company overestimating the price of a product

11. Absorption
Costing
 Absorption Cost Pricing
 It rests on the estimated unit cost of the product at the normal level
of production and sales. The method uses standard cost techniques
and works out the variable and fixed costs of sales, production etc.
when the cost of these three operations are added, the total cost
becomes available. To the total cost, the required margin is added
towards profit and total becomes the selling price of the product.

12. Absorption
cost pricing
 Advantages
 Consideration of Fixed Costs
 Seasonal Sales
 Conformity with Accrual and Matching Concepts
 External Reporting
 No Need to Separate Costs as Fixed andVariable
 Relevance of Under-absorption and Over-absorption
 Accountability of Departmental Managers
 Limitations
 Fixed Costs are Period Costs
 Apportionment of Overhead Costs
 Not Useful in Decision Making
 Inflated, Not Real, Profit
 Impact on Long-Term Profit

13. Rate of Return
Pricing or
Target Pricing
Method
 Cost-Based Pricing
 If a small business owner makes three types of scented candle, she must decide
on an appropriate price to charge for each candle before bringing the products
to market. The most basic way to calculate a reasonable price for the candles is
to calculate how much each candle costs to produce and then add a certain
percentage as profit or do without a profit temporarily to break into the market.
However, determining which costs to include is not always straightforward.
 Full-Cost Pricing
 When calculating cost-based pricing, the business owner must decide whether
to include only the costs directly associated with that specific product or all the
costs of the business. Full-cost or fully distributed cost pricing includes a share
of all business costs in the final price. In the case of the scented candle business,
the rent on a table at a local Renaissance fair would be an example of a shared
cost. In a full-cost pricing strategy, the table rent would be divided in three and
assigned equally to each of the three types of candles to cover the cost.
 Marginal-Cost Pricing
 In a marginal-cost pricing system, the cost of the product does not include fixed
costs that are not specific to that product. The cost of the table rent is not
considered part of the cost of the candle. Instead, the owner calculates the
costs for producing that particular candle and then adds a margin equal to the
cost of making one more candle. The margin can be used to help the business
owner pay for the table rent if she chooses, but doesn't put an equal share of
the rental cost on a candle that may prove less profitable.

14. Rate of Return
Pricing orTarget
Pricing Method &
MarginalCost
Pricing
 Rate of Return Pricing or Target Pricing Method: An arbitrary
desired rate of profit on the capital invested is determined by the
firm. This desired rate of profit is calculated on the basis of the
rate of return.
 Marginal Cost Pricing: The marginal cost pricing aims at
maximizing the contribution towards fixed costs. The marginal
cost will include all direct and variable costs of product. In
marginal costing the direct variable costs as well as some of the
part of fixed cost is also realized.

15. Demand/Mark
et Based
Pricing
 Demand-based pricing, also known as customer-based pricing, is
any pricing method that uses consumer demand - based on
perceived value - as the central element.
 These include: price skimming, price discrimination, psychological
pricing, bundle pricing, penetration pricing, and value-based pricing.

16. Demand/Mark
et Based
Pricing
Demand/Market Based Pricing
• Price skimming
• Price discrimination
• Psychological pricing
• Bundle pricing
• Penetration pricing
• Value-based pricing

17. Demand/Mark
et Based
Pricing
 Price skimming is a pricing strategy in which a marketer sets a
relatively high price for a product or service at first, then lowers the
price over time.
 Price discrimination exists when sales of identical goods or services
are transacted at different prices from the same provider.
 Psychological pricing is a marketing practice based on the theory that
certain prices have a psychological impact.
 Bundle pricing is a marketing strategy that involves offering several
products for sale as one combined product.
 Penetration pricing is the pricing technique of setting a relatively low
initial entry price, often lower than the eventual market price, to
attract new customers.
 Value-based pricing sets prices primarily on the value, perceived or
estimated, to the customer rather than on the cost of the product or
historical prices.

18. Competition
Oriented
Pricing
 Competitive-based pricing, or market-oriented pricing, involves setting a
price based upon analysis and research compiled from the target market
.With competition pricing, a firm will base what they charge on what other
firms are charging.
 Competitive pricing is setting the price of a product or service based on
what the competition is charging. This pricing method is used more often
by businesses selling similar products, since services can vary from business
to business, while the attributes of a product remain similar.
Competitive based
pricing
Premium Pricing Parity Pricing Discount Pricing

19. Product Line
Pricing
 The process used by retailers of separating goods into cost categories in
order to create various quality levels in the minds of consumers. Effective
product line pricing by a business will usually involve putting sufficient
price gaps between categories to inform prospective buyers of quality
differentials.

20. Tender Pricing
 To tender is to invite bids for a project, or to accept a formal offer such as a
takeover bid. Tender usually refers to the process whereby governments
and financial institutions invite bids for large projects that must be
submitted within a finite deadline
 Business firms are often required to fix the prices of their products on
tender basis. Tender pricing is of special type though it is also a
competition oriented method of pricing. It is more applicable to industrial
products and the products or services purchased or contracted by
institutional customers. Such competitors usually go by competitive
bidding through sealed tenders or by quotation. They seek the best price
consistent with the minimum quality specifications

21. Affordability
Based Pricing
 This method is relevant in respect of essential
commodities which meet the basic needs of all the
people. The idea here is to set prices in such a way that
all sections of population are in a position to buy and
consume the products to the required extent.

22. Differential
Pricing
 The term differential pricing is used to describe the practice of charging
different prices to different buyers for the same quality and quantity of a
product, but it can also refer to a combination of price differentiation and
product differentiation.
 1st Degree Price Discrimination is charging a different price based on the
customer. 2nd Degree Price Discrimination is charging a different price
based on quantity sold. 3rd Degree Price Discrimination is charging a
different price based on location of customer segment.
 Price discrimination is illegal if it's done on the basis of race, religion,
nationality, or gender, or if it is in violation of antitrust or price-fixing laws.

23. Price
Determination
Process
 Collecting basic information
 Estimating product demand
 Estimating and analyzing competitive reactions
 Evaluating internal environment
 Considering marketing mix components
 Determining expected share of market
 Selecting a suitable share of market
 Selecting the prices

24. Responding to
competitors
price changes
 Maintain Price
 Reduce Price
 Increase Price and Improve Quality
 Launch a low price fighter line