PRICING
Pricing Policy
Pricing policy plays a dominant role in the overall policy of a business firm.
Formulating pricing policies and setting the price are the most important aspects of managerial decision-making.
Pricing policy should aim at maximizing profit, stabilizing prices and profit margin, flexible to various prices.
Pricing Methods
1.Cost-Plus or Full-Cost Pricing Method
2.Target Pricing or Pricing for a rate of return
3.Marginal Cost Pricing
4.Going-Rate Pricing
5.Customary Pricing
6.Differential Pricing
1. Cost-Plus or Full-cost Prizing
The Full-Cost Pricing method is generally adopted by many of the firms for simple and easy procedure.
This method is also called Cost-plus pricing, margin pricing and Mark-up pricing.
Under this method, the price is set to cover all costs (material, labour and overhead) and a predetermined percentage for profit.
This means the selling price of the product is computed by adding a certain percentage to the average total cost of the product.
2. Target Pricing or Pricing for a rate of return
This method of pricing is only a refinement of the full-cost pricing.
According to this method, the manufacturer considers a pre-determined target rate of return on capital investment.
In the case of full-cost pricing, the percentage of profit is marked up arbitrarily.
In the case of rate of return method, the companies determine the average make-up on costs necessary to produce a desired rate of return on the company’s investment.
3. Marginal Cost Pricing
In the first two methods, i.e., full-cost pricing and the rate of return pricing, prices are fixed on the basis of total costs comprising of fixed costs and variable costs.
Under marginal pricing method, the price of a product is determined on the basis of the marginal or variable costs.
In this method fixed costs are totally ignored and only variable costs are taken into account.
An example of calculating marginal cost is:
The production of one pair of shoes is $30. The total cost for making two pairs of shoes is $40. The marginal cost of producing the second pair of shoes is $10.
4. Going-Rate Pricing
Going rate pricing is a pricing strategy where firms examine the prices of their competitors and then set their own prices broadly in line with these.
Setting a price for a product or service using the prevailing market price as a basis.
Going rate pricing is a common practice with homogeneous products with very little variation from one producer to another.
Examples include clothing, automobiles, etc.,
5. Customary Pricing
A method of determining the price for a good or service based on the perceived expectations of customers.
Customary pricing is generally used for products with a relatively long market history of being sold for a particular amount, and is driven by intuitive notions of value on the part of buyers.
6. Differential Pricing
The term differential pricing is also used to describe the practice of charging different prices to different buyers for the same quality and quantity of a product, but it can also refer to a combination of price differentiation and product differentiation.
Differential pricing may be designed to encourage new users or to attract new customers.
Specific pricing problems
Pricing of Joint products Pricing a New product
Skimming Price strategy Penetration Price strategy
Pricing over the life cycle of a product Product Line Pricing
Mark up an Mark down pricing Export pricing Dual pricing
Pricing of joint products
Modern firms are engaged in the production of many commodities and multiple products, and not a single commodity only.
When a firm produces more than one commodity at a time and it its demand and cost functions for each such commodity can be distinguished, there will not be any problem.
But if firms produce multiple products and demand alone can be separated, but costs are common, the difficulty arises in applying the same principles of pricing.
Pricing a new product
The introduction and marketing of a new product will pose a challenging problem for any firm.
Skimming price strategy – the price of a new product is fixed high at the initial stage.
Penetration price strategy – the price of a new product is fixed low at the initial stage.
Pricing over the life cycle of a product
The innovation of a new product and its degeneration into a common product is termed as the life cycle of a product.
Various stages in Life cycle of a product includes introduction, growth, maturity, saturation and decline.
Pricing properly in each stage is crucial part of an organization.
Product Line Pricing
Product line pricing is a method of pricing which studies price determination of only those products which are physically identical to each other or which are for the same purpose.
It also refers to the determination of prices of individual products and finding the proper relationship among the prices of members of a product group.
Mark up an Mark down pricing
When the retailers follow the principle of cost-plus, they are supposed to follow the ‘Mark-up Policy’.
That is, the retailers will follow the practice of fixing the price such that it covers the cost and leaves a reasonable margin of profit.
In case certain goods are not sold within a reasonable time, the retailers may ‘Mark down’ the price.
Export pricing
Pricing the commodity for the international market is very important, as it is highly competitive and extremely sensitive to the price factor.
The individual exporters have practically no control over the price.
In respect of export pricing, the concept of marginal pricing comes in very handy.
Dual pricing
It is a method of pricing of a product under which the product may have two prices.
One is controlled price fixed by the Government and the other one is the market price usually determined on the basis of cost production and a reasonable margin of profit.
Dual pricing is thus a price control of price regulation system.