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Pricing Policy

Managerial decision making involves one


important thing i.e set up of price of the
product.
The businessmen use the pricing device for the
purpose of maximising profits.
Many problems come in the way of
determining a price of the product.
In order to avoid different problems, managers
or businessmen must resort to suitable pricing
methods for set up of price of the product.

Pricing Methods
There are five important methods of pricing
(i) Cost-plus of full cost pricing
(ii) Pricing for a rate of return
(iii) Marginal Cost Pricing
(iv) Administered Pricing
(v) Going-rate Policy


(i) Full Cost Pricing Method or Cost Plus Pricing
Cost-plus or full cost pricing is a method
commonly adopted by the businessman to
fix a price of the product.
He calculates the cost of production per unit
and adds a margin of profit to it.
In other words, the producer adds a certain
percentage of profit which he considers as
fair to his cost in order to arrive at a price
which is acceptable to the consumers.

Cost-plus pricing means the addition of certain %
of profit to the cost of production to arrive at a
price.
Advantages :
Easy and Convenient method
In practice, firms are uncertain about the demand
conditions facing them, so moving away from the
cost-plus price may be too risky.
Cost-plus pricing is more popular and suitable in
industries where price leadership prevails.
Limitations :
Ignores the demand side of the problem.
Fails to consider the importance of
competition.
Ignores the future cost in the pricing
decision.

Rate of Return Pricing or Target Pricing
Under the method of rate of return pricing,
the price is determined based on the pre-
determined target rate of return on capital
invested by the manufacturer.
Rate of Return Price is determined in
five steps.
It is evident from the final step that
ROR
p
changes as the costs change.

Similarly, if the demand conditions or
competition for the product undergoes a change
the mark-up will change, thus leading to a price
change.
Since this method of pricing has the same
underlying logic as cost-plus pricing, its
advantages and limitations are similar to those of
cost-plus pricing.
However, it has two additional advantages over
the cost-plus pricing :
(i) In case of ROR pricing, full cost is based on
normal output and cost, which is not so in case
of cost-plus pricing.
(ii) In ROR pricing mark-up is based on expected or
planned rate of return on investment, whereas
cost-plus pricing is based on arbitrary mark-up.