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# Sem ii-topic-2-pricing

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### Sem ii-topic-2-pricing

1. 1. PRICING PRICING AND SALES VOLUME DECIDE THE REVENUE FOR ANY BUSINESS THE PROCESS OF PRICING INVOLVES --Setting Price Objectives --Determining The demand --Estimating the cost of production --Analyzing competition --Selecting a suitable method of pricing -- Deciding the final price --
2. 2. Setting the Price Objective --Survival -- Profit --Return on investment --Market Share --Cash Flow --Status Quo --Product quality
3. 3. DEMAND ESTIMATION  PRICE SENSTIVITY Unique Value Effect -Substitute Effect -Comparison Difficult -Total Expenditure Effect -End Benefit Effect Shared Cost Effect Sunk Investment High Quality Cannot be inventoried
4. 4. DEMAND ESTIMATION Contd/-Demand Curves -- Demand can be estimated by analysis of past sales and prices --Using different prices in similar regions to gauge sales --Ask the buyers of their likely demand at various prices
5. 5. DEMAND ESTIMATION Contd/ PRICE ELASTICITY Of DEMAND  Change in demand as a response to change in price    Calculated by dividing the percentage change in demand by percentage change in prices If very little change in demand due to price, the demand is inelastic If considerable change in demand due to price change, it is called elastic
6. 6. DEMAND ESTIMATION Contd/ Demand elasticity is likely to be low when  --Very few substitutes or competitors  --Buyers do not notice the price change  --Consumer reaction is likely to be slow to price change  --Consumers attribute price rise to external factors like inflation, scarcity etc
7. 7. ACCUMALATED PRODUCTION  ACCUMALATED PRODUCTION  Average costs decline with accumulated experience.    STANDARD COSTING ACTIVITY BASED COSTING TARGET COSTING
8. 8. ANALYSING COMPETITION          A CHANGE IN YOUR PRICING MAY SHIFT THE CONSUMERS TO COMPETITION MARGINAL ANALYSIS --Fixed Costs- Costs that do not change with volume -- Variable costs- Costs that vary with volume Avg cost=Avg fxd costs+Avg variable cost Marginal cost is the cost incurred in producing an extra unit Avg total cost decreases if marginal cost<avg cost Avg total cost increases if marginal cost>avg cost Marginal revenue therefore must be>than avg revenue
9. 9. ANALYSING COMPETITION Contd/--Break even analysis Break-even is that volume of sales where the co does not make any profit or losses --The co must determine the breakeven volumes for different levels of pricing The major assumption in break even analysis is that demand is usually fixed and the major objective is to recover costs Pricing decisions are made keeping in mind competitive situations
10. 10. PRICE COMPETITION  A co must be a low cost seller of products  Low cost producers usually market standard goods  They frequently change their prices in response to mkt conditions  Face danger of undercutting by competitors  Can result in chronic price wars
11. 11. NON PRICE COMPETITION      A non price producer competes on other attributes eg quality, service, packaging, brand equity Attempts to build loyalty The buyers should not only see the difference but consider it significant The distinguishing and differentiating features should be difficult for competition for competition to copy The co promotes and highlights the differentiating features
12. 12. PRICING MEHTODS  The major price setting methods are --Mark Up pricing --Target return pricing --Perceived value pricing -- Value pricing --Going rate pricing --Sealed bid pricing
13. 13. PRICING METHODS    MARK UP PRICING A mark up is given to the total cost Generally, higher for seasonal products, in-elastic products, slow moving items  TARGET RETURN PRICING This method is used when a pre-determined rate of return is desired and thr price is set accordingly.  PERCEIVED VALUE PRICING   Price is based on the buyers perception of the value of the product which is built up by the cos thru promotions, advt etc
14. 14. PRICING METHODS Contd/ VALUE PRICING The manufacturer charges fairly low prices for high quality product or services  The price should represent a high value to the customer     Does not mean that prices are just lowered; rather, the entire process is re-engineered to give a better product at a lower price. GOING RATE PRICES The cos set the prices on the basis of prevailing rate. Generally used in oligpolistic situations
15. 15. PRICE ADAPTATION  GOODS CAN OFTEN HAVE DIFFERENT PRICES DEPENDING ON A HOST OF FACTORS  The pricing structure has to reflect and account for factor like geographical spread, purchase timings, segment requirement, service contract, order level ,frequency of purchase, delivery schedule etc
16. 16. DISCOUNTS &ALLOWANCES  TRADE DISCOUNT  QUANTITY DISCOUNT  CASH DISCOUNT  SEASONAL DISCOUNT  ALLOWANCES
17. 17. PROMOTIONAL PRICING  LOSS LEADER PRICING  SPECIAL EVENT PRICING  PSYCHOLOGICAL DISCOUNTING  CASH REBATE  LOW INTEREST FINANCING  LONGER PAYMENT TERMS  WARRANTIES AND SERVICE CONDITIONS
18. 18. EXPERIENCE CURVE PRICING  A company ,by virtue of experience, gains the required level of skills higher than prevalent in the industry. This enhances their productivity and thus it acquires a competitive edge.  The co must, however, acquire a leading market share during the early stages of the product life cycle to be in a position to take advantage of experience curve pricing
19. 19. DISCRIMATORY PRICING  CUSTOMER SEGMENT PRICING  PRODUCT FORM PRICING  IMAGE PRICING  LOCATION PRICING  TIME PRICING
20. 20. PRODUCT MIX PRICING  PRODUCT LINE PRICING  OPTIONAL FEATURE PRICING  CAPTIVE PRODUCT PRICING  TWO PART PRICING  BY-PRODUCT PRICING  PRODUCT BUNDLING PRICING