Pricing Policies

Revenue Analysis

TR = P*Q AR = TR/Q i.e P*Q/Q= P MR = change in TR/ change in Q Relationship of TR with elasticity of demand: - dd relatively elastic : price change will result in greater change in quantity sold: hence TR increases with decrease in price - dd relatively inelastic: price change will cause lesser change in quantity sold, hence TR increases with increase in price

Price change Price increase

E >1

E<1

TR TR decreases increases

Price TR decrease increases

TR decreases

Objectives of Pricing Policy

To maximise profits Price stability : build confidence in company Capture the market : esp. while introducing a new product Face competitive situation : to restrict entry of rival firms Encash on ability to pay: like professional services of doctors, lawyers etc.

Different Pricing Policies

Marginal Cost pricing: where MC = MR, optimal price that maximizes total profits Full cost or cost plus or markup pricing: price fixed to cover total costs including fixed and variable, and a component of profit called mark up, mostly followed in industries with heavy investments like automobiles, steel etc

Going rate pricing: as per existing price of similar product in the market Imitative pricing: imitates price of leading firm like in oligopoly Pricing a new product: - Skimming price: when new product launched, little information available on acceptable market price, hence higher price fixed initially to avoid losing customers willing to pay higher price; price later reduced to match price elasticities, eg in consumer durable products - Penetration pricing: price fixed low to gain foothold in the industry

Two- Part Tariff: a lump sum charge and a user fee, one part increased for compensating decline in the other part, eg. In cellular phone companies, clubs etc. Peak Load Pricing: is successful when demand varies with time of the day and has different elasticities; peak time users bear higher price than off peak time users eg. telephone, electricity, computer time etc.

Product Bundling: sometimes it is more profitable for seller to bundle two goods and sell them as a package, eg. in combo deals in a restaurant Price Lining: here price is determined first and then features are introduced in the product to justify this price, eg. in cars Prestige Pricing: followed in markets where price associated with quality (esp. when no objective information on product quality is available), product has snob value , hence price fixed high arbitrarily, eg. Diamonds, fur, leather, luxury automobiles

Price Matching: practice to match lower price offered by any competitor in the market; inspires trust in consumers towards the seller, enables it to charge higher price initially Auction Pricing: eg. in internet purchases of books, airline tickets, hotel rooms etc., where customer offers his buy price and site matches it with a seller