This document discusses various pricing methods used by producers, including cost-plus pricing, marginal cost pricing, and administered prices set by governments. It also covers pricing over the lifecycle of a product from introduction to decline, as well as strategies for pricing new products and products in relation to established substitutes. Cost-plus pricing involves calculating costs and adding a percentage profit margin. Marginal cost pricing sets price based on variable costs. Administered prices control prices to prevent shortages or price gouging. Pricing changes as products move through stages from growth to saturation. New products may use skimming or penetration pricing depending on substitutes. Pricing relative to competitors can be at, below, or above existing market prices

1. Pricing Methods
Cost - plus pricing
Also known as mark up pricing, average cost pricing or full cost
pricing.
Under this method the producer calculates the cost of production
per unit ( variable plus fixed costs) and adds a ‘fair’ percentage of
profit in order to arrive at a price which is acceptable to the
consumers .
There are three methods of computing cost. They are
Actual cost – Those costs which are actually incurred by the firm
In order to produce a given commodity – also called historical
cost.
Eg. Wage bill, raw materials cost etc.

2. • The expected cost - It is a forecast of the actual
expenses for pricing period. It is also known as the
projected cost for the time period taken to launch a
project.
• Standard cost – It is a normal cost determination at
some normal rate of output at a given level of utilization.
• A firm may follow one of the any above methods to
arrive at a cost and add a fair rate of profit ( usually
between 10 & 15 % of the cost ) and determine the
price.
• Limitations:
• The cost – plus pricing ignores the demand side of the
problem.
• It fails to consider the importance of competition, and
as such it should take into consideration the price of
the products of the rival .

3. • When a firm manufactures and sells multiple products, costs
cannot be allocated precisely and hence this method becomes
invalid.
• This method does not use economic tools altogether. It
considers the past and present cost and ignores opportunity cost
and future cost.
Usefulness :
• It helps in selling a product at fair and reasonable prices.
• Easy for all firms to calculate this price and apply.
• Safeguards the interest of the firm against risks when the
demand is uncertain.
• Economical for decision making by the firm.
• Helps the firm in protecting against price wars or competition.
• Cost – plus pricing is more useful especially in public utility
pricing.

4. Marginal Cost Pricing: It refers to the method of
determining the price on the basis of marginal or variable.
Fixed costs are ignored and those costs that are directly
attributable to the output is considered.
The price so determined must cover the marginal cost and
the total cost will be covered in the long run.
When a firm has large unused capacity, it should explore
the possibility of producing and selling more, where it
should cover at least the marginal cost.

5. Administered Prices
They are the prices of commodities fixed by the government to
prevent price escalation, black marketing and shortages in supply.
It denotes a pool price while the production units are given an
assured price called retention price.
They are fixed on the basis of the cost of production plus a certain
amount of profit.
Need for Administrative Pricing
• To correct the imperfections in the market mechanism.
• To arrest the undue price rise of scarce essential
consumption
• goods and raw materials when there is less than their
demand.
• To provide a relatively stable and assured income to the
farmers.
• To protect the consumers from greedy monopolists.
• To provide the items of mass consumption at low subsidized
• prices to the poor sectors of the society.

6. Advantages
Administered prices protects the interest of the weaker sections of
the society by discouraging and encouraging the consumption of
certain commodities.
It also mitigates inflation or prevent strong deflation.
It increases the public revenue.
It ensures efficient allocation of scarce revenue.
It also helps in promoting egalitarian.
Limitations
Sometime, administered prices may discourage the production of
certain goods. Eg . fertilizer, cement, steel, electricity , generation
and railways.
Changes should be introduced when there is a change in the cost of
production. Otherwise, it will lead to reduction in supply of certain
goods ( which comes under administered prices) in the economy.

7. Pricing in life-cycle of a product.
The innovation of a new product and its degeneration into a common
product is known as life cycle of a product. The life-cycle of a product
is generally divided into five stages.

8. Introductory stage: In this stage, the product is introduced into
the market with all necessary propaganda but the dd for the
product is low in the beginning.
The firm incurs higher promotional costs, but the sales revenue is
low, and it cannot cover any costs fully.
Growth stage: After a successful trial, during which the product
gains popularity among the consumers and sales increase at an
increasing rate. The company earns good profits after covering
the entire costs.
Marurity stage:The volume of sales goes on increasing but the
rate of growth is rather slow. All those who need the product have
already purchased it and the new customers are few.
The firm spends considerable amount on sales promotion to boost
sales. But there is only replacement demand and no new dd.
During this period there will be more innovation, which results in
the development of a better product. Dd for the old product starts
declining. This is the period of saturation

9. Saturation Stage:The total sales saturates-there is neither increase nor
decrease in the sales volume.
The firm is producing the product at a higher cost. Sales are declining. It
starts incurring losses. It enters the stage of decline.
Decline stage: The sale of the product falls significantly. Rival product
emerges with better quality and appearance. The existing product loses
its distinctiveness.
Multi-Product pricing or Product line pricing
Modern industrial concerns are producing many products. They are
multi-product producers and are classified into several types.
A joint product firm. Eg. Soap is the main product and glycerine and
cosmetics are also produced.
Firm producing related products. Eg a company producing various
types of shoes.They are producing with same materials & labour and
hence some interdependence.
Firm producing unrelated products.Eg. A firm (godrej) manufacturing
fridge, washing machine steel almirahs etc.They use different
facilities, raw-materials etc.They manufacture these unrelated
products mainly to take advantage of goodwill and sales network.

10. Mult-product pricing requires the study of
following relations
Demand Relationships
If the products are either substitutes or
compliments, a change in the price of one
product affects the dd for a related product based
on the cross elasticity.
Cost Relationship
When the multiple products are produced with the
same production facilities, some costs are directly
chargeable to the products and some costs are
common to all.

11. • Production Relationships
• When the multiple products are produced, a primary
product along with several by-products can be
produced either through fixed or variable proportions.
• Capacity Relations
• If a firm has excess capacity, this can be used to
produce one or more additional products. The cost
fixed factors can be shared b/n other products.
• In pricing multiple products, each product has
separate AR & MR curves and one inseparable MC
&AC curves.
• Just as a discriminating monopoly tries to maximize its
revenue, so also a multi-product firm should try in
respect of each of its product.

12. Pricing a New product
It depends on the following factors:
1) Product Acceptability:It means how many consumers are
willing to buy the new one in the place of the old one.
2) Range of prices : It means at what prices different quantities of
the product will be demanded.For this we can make use of the
survey results of market research institutions.
3)Expected volumes of sales: It depends upon DD elasticity and
cross elasticity.
4) Reaction of price: The company that introduces a new
product will have to moniter the activities of the rivals in order to
launch their own marketing strategies.
Pricing a new product depends mainly on whether or
not close substitutes are available.

13. Pricing a new product depends mainly on whether or not close
substitutes are available.
Generally two kinds of pricing strategies are suggested,viz.,1)
skimming price and 2) penetration price policy.
In skimming price no close substitutes are available. A firm sets
a high initial price, three or four times the ex-factory price and
subsequently lowers prices in a series of reduction especially in
case of consumer durables with heavy sales promoting
expenditure.
Penetration price policy is adopted for new products for which
substitutes are available. The firm fixes a lower price designed
to penetrate the market as early as possible and is intended to
maximize the profit in the long run by gradually raising the
price.

14. Pricing in Relation to Established Products
Many producers enter the market often with a new brand of
commodity for which a number of substitutes are available
because of the strong competition Eg. tooth paste, cars etc.
normally three pricing strategies are adopted.
Pricing below the market price
The above system is followed when a firm wants to expand its
product -mix with a view to utilizing its unutilized capacity .It
gives an opportunity to gain popularity and establish itself.
The price incentive must be high enough to attract new
customers who have a high brand loyalty for the established
products. Another technique is in the case of innovative
products whose price may be raised gradually to the level of
market price.

15. Pricing at par with market price
It is considered the best pricing strategy for the price taker of a
product which is being sold in a competitive market as the
product can be sold in any quantity at the existing market price.
Pricing above the existing market price:
It is followed when the products are commodities of
conspicuous consumption.Consumers of such commodities .
prefer shopping in a gorgeous shop of a posh locality of the
city.
After the seller achieves the distinction of selling high quality
goods, though at a high price, he may even sell the ordinary
goods even at a price higher than the market price. Eg.
Readymade garments.