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
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Setting the Price Objective

--Survival -- Profit --Return on investment --Market Share --Cash Flow --Status Quo --Product quality

DEMAND ESTIMATION

Unique Value Effect -Substitute Effect

PRICE SENSTIVITY

-Comparison Difficult -Total Expenditure Effect -End Benefit Effect Shared Cost Effect Sunk Investment High Quality Cannot be inventoried

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

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

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

ACCUMALATED PRODUCTION

ACCUMALATED PRODUCTION
Average costs decline with accumulated experience.

STANDARD COSTING ACTIVITY BASED COSTING TARGET COSTING

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

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

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

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

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

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

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

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

DISCOUNTS &ALLOWANCES
TRADE DISCOUNT QUANTITY DISCOUNT CASH DISCOUNT SEASONAL DISCOUNT ALLOWANCES

PROMOTIONAL PRICING
LOSS LEADER PRICING SPECIAL EVENT PRICING PSYCHOLOGICAL DISCOUNTING CASH REBATE LOW INTEREST FINANCING

LONGER PAYMENT TERMS

WARRANTIES AND SERVICE CONDITIONS

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

DISCRIMATORY PRICING
CUSTOMER SEGMENT PRICING PRODUCT FORM PRICING IMAGE PRICING LOCATION PRICING TIME PRICING

PRODUCT MIX PRICING

PRODUCT LINE PRICING OPTIONAL FEATURE PRICING CAPTIVE PRODUCT PRICING TWO PART PRICING BY-PRODUCT PRICING

PRODUCT BUNDLING PRICING