This document discusses various pricing strategies and considerations for setting prices. It begins by explaining that pricing is one of the most difficult stages in the business control cycle, as the price must match the market structure while covering costs and generating profits. Several pricing methods are then outlined, including cost-plus pricing, market penetration pricing, psychological pricing, market skimming pricing, departmental pricing, and differential pricing. The document also discusses pricing considerations like cover price, minimum price, discounting pricing, and discriminatory pricing. Overall, the document provides an overview of different approaches to setting prices and factors to take into account.

1. CHAPTER 6 SELLING
6.1 The pricing of Menus – Cost plus, Market penetration, Psychological pricing, Market
Skimming pricing, Departmental pricing, Differential pricing
6.2 Pricing Consideration – cover price, minimum price, discounting pricing, discriminatory
pricing
6.3 Function costing & pricing

2. Introduction: The final selling stage of the control cycle is one of the most
difficult in practice. The main factor involved here is pricing.
Pricing method is a technique that a company applies to evaluate the cost
of its products. This process is the most challenging challenge encountered by a
company, as the price should match the current market structure and compliment
the expenses of a company and gain profits. Also, it must take the competitor’s
product pricing into consideration so, choosing the correct pricing method is
essential.

3. In an industry which has a high proportion of fixed costs, pricing is
particularly difficult. This is so, because in establishments operating at high profit
margin there is a relatively wide range of price discretion. For e.g., a retailer
(whose gross profit margin tends to be quite narrow) buys an article for Rs. 20/-
& sells it for Rs. 25/-. He can do so only if his competitors charge the same. He
would find it difficult to sell it at any higher price. In such a situation, price
discretion is very narrow & pricing becomes a relatively easy process.

4. An expensive hotel, on the other hand, may charge Rs. 30/- for a breakfast
although its direct food cost may be only Rs. 5/-. In such a situation, the gap
between direct cost & selling price is very wide & a wide range of price
discretion.
In other words, in many catering situations there is a multiplicity of prices
that can be charged. Thus, the higher the profit margin, the larger the no. of prices
that can be fixed in respect of an article.
Following are some methods or strategies used for pricing.

5. Cost plus Pricing: It is also known as Markup pricing. In this method, a fixed percentage is
added on top of the cost required to produce one unit of a product. The resulting number is the
selling price of the product.
This pricing method looks solely at the unit cost and ignores the prices set by
competitors. For this reason, it's not always the best fit for many businesses because it doesn't
take external factors, like competitors, into account.
Retail companies like clothing, grocery, and department stores often use cost-plus
pricing. In these cases, there is variation in the items being sold, and different markup
percentages can be applied to each product.
Markup is the percentage difference between the unit cost and the selling price of the
product.

6. Market penetration pricing: It is used to quickly gain market share by setting
an initially low price to attract customers to purchase. This pricing strategy is
generally used by new entrants into a market. An extreme form of penetration
pricing is called predatory pricing.
The goal of this pricing strategy is to capture market share, create brand
loyalty, switch customers from competitors, generate significant demand,
utilise economies of scale and drive competitors out of the market.
This strategy is not always successful as customers will always expect
price to be low, not result in customer loyalty, damage brand image and lead to a
pricing war.

7. Psychological pricing: It is a pricing strategy that impacts the consumer’s
subconscious mind, including pricing the goods and services slightly lower than a
whole number. The consumer tends to believe that the prices are relatively lower
as they process it from left to right, so that they may ignore the last few numbers
of the selling price.
Also, this strategy keeps the price within the defined pricing brackets, i.e.,
some points (0.01 or 0.1) are less than the whole number. That makes the price
more affordable in front of the consumers, attracting more customers.
Bata Co. in India is considered as pioneer of this pricing strategy. It has
used this strategy very effectively.

8. Market Skimming pricing: The phenomenon of price skimming occurs whenever a new
scarce product enters the market, competition is low and demand for the product is high, and
the business accumulates as much profit as it could to take advantage of the situation.
Price skimming is the strategy where marketers charge higher price of its product and service
in the beginning, and then reduce it over time. The purpose of charging more is because of
reasons like covering the initial research and development cost and checking the demand
whether customers would pay for it or not.
Once the company sees the opportunity of demand and growth in the market, then it starts
producing it at a mass scale, and that would lower the price of the product or service. As a
result, the business also attracts many price-conscious consumers.

9. Electronic products like cell phones are great examples of price strategy.
Whenever, a brand like Sony, LG, Samsung, Huawei, Apple, Google, Nokia
Oppo, Vivo, or any other launches a new model of a cell phone, price of it is very
high.
When other companies start offering the same product but with more
features; or the company launches some new model, then the prices of the
previous start declining gradually. Sometimes the company even stops
manufacturing the previous model after launching the new models.

10. Departmental pricing –
In this method of pricing, the hotel each department differently. Based on
the cost of each department and the expected price from each of the department,
the prices are fixed.
Thus, in a same company different departments will charge different prices.
In hotels, different rates are charged for Rooms, Food , Beverage Laundry and
other services.

11. Differential pricing -The differential pricing strategy means certain customers
pay less for the same product than others pay. This technique works for services,
admission fees, restaurants and products. The nature of differential pricing
generally avoids conflict or feelings of unfair treatment by those who don't
qualify for the discount.
A differential pricing strategy allows the company to adjust pricing based
on various situations or circumstances. The price variations come in different
forms, from discounts for a particular group of people to coupons or rebates for a
purchase. Knowledge of differential pricing allows you to determine if this
strategy is a possibility for your company.

12. 6.2 Pricing Consideration – cover price, minimum price, discounting pricing,
discriminatory pricing
Cover Price: The term cover in a restaurant refers to one meal, or one customer served in a
restaurant. Generally, the term cover refers to a guest served during a given period. Covers are
a valuable metric for forecasting the business.
Projecting sales, Staffing, and Server effectiveness can be done by keeping track on the
covers. This enables to fix the price per cover and enable changing it when the need arises.
Minimum Price: A minimum price sets the lowest level that a good or service can legally be
sold for. It is the price at which the firm recovers its total cost and gets a decent profit for future
expansion and growth. This is on of the important consideration of product pricing.

13. Discounting pricing: When a company is struggling to move excess inventory,
wants to sell low-priced products in high volumes or is looking to generate
buying interest in one of its, new introductory products, it may resort
to Discount Pricing Strategy to assist it in achieving business objectives at a
national, international or even a regionalized level.
Discount pricing is a type of pricing strategy where the company marks
down the prices of its products.
Most businesses will also use alternate pricing strategies, so they are not
required to depend on discount pricing for extended periods of time.

14. Discriminatory pricing: Companies often adjust their basic price to accommodate
differences in customers, products, locations, and so on. Price discrimination occurs
when a company sells a product or service at two or more prices that do not reflect a
proportional difference in costs.
In first-degree price discrimination, the seller charges a separate price to each
customer depending on the intensity of his or her demand.
In second-degree price discrimination, the seller charges less to buyers who buy
a larger volume.
In third-degree price discrimination, the seller charges different amounts to
different classes of buyers.

15. A discount pricing strategy best suits bricks-and-mortar and ecommerce business. It can
include a variety of different discounts, working independently or together in combination
including:
Quantity Discounts: Here the company offers discounts for product orders that come in
higher quantities, or a large quantity of assorted products. Offers such as buy one, get one free
or other offers such as free bulk delivery for multiple items are all forms of quantity discounts.
Loss Discounts: At times, a company may offer discounts that leads to a loss of profits. The
aim of this type of discount is to attract customers to online or bricks-and-mortar stores, with
the hopes that they’ll buy other products that boast a higher profit margin while they are
visiting.

16. Dated Discounts: Here discounts are offered for transactions that occur on or before
specific dates. For example, a Cable TV or online magazine subscription service may
offer customers a discount for customers that regularly pay their monthly subscription
early or an even larger potential discount for those customers choosing to pay for an
annual subscriptions.
Location Discounts: A business may choose to offer discounts based on geographical
reasons, including lower delivery costs for example. That may include heavier discounts
for customers collecting products in-store or those customers using a drop-off box
location instead of an expensive delivery option.

17. New Customer Discount Strategy – Some companies will offer new customers
discounts on their initial purchases with the business. In this case, it is a sturdy
discounting strategy that can drive new customer acquisition and attract potential repeat
business.
Cash Discounts: On some occasions, a company may choose to discount certain
products for cash purchases only. Usually, the purpose of a cash discount is to eliminate
credit card processor fees for a smaller business, which can potentially be up to as much
as 4% in lost revenue every time a customer swipes a card.

18. Loyalty Discounts: A company may offer discounts that are exclusive to frequent,
loyal, or high-spending customers. The size of the discounts may vary, ranging from the
‘level’ of the customers’ standing on the loyalty programs through to exclusive or VIP
membership discounts. For example, a coffee chain may offer a point system on the
number of coffees purchased, or the best-known example is that of airlines offering
miles rewards for frequent fliers.
Seasonal Discounts: Seasonal discounts may be offered by companies to its customers.
With seasonal discounts, it can clear old inventory or markdown on items that are out of
season. Winter clothes in end of season sales etc.

19. 6.3 Function costing & pricing