Cost based, break even , Target return, competition based

1. PRICING CONSIDERATIONS AND
PRICING APPROCHES
Dr. M. Umamageswari
Assistant Professor (Agricultural Economics)
JSA College of Agriculture &Technology
(Affiliated toTamil Nadu Agricultural University)
Ma. Podaiyur,TittagudiTk. ,
Cuddalore District – 606 108

2. PRICE
Simply Defined
 The amount of money charged for a product or
service
Broadly Defined
 The sum of the values that consumers exchange for
the benefits of having or using the product or
service.

3. Price
 Price has been the major factor affecting
buyer choice (Historically)
 Recent times – Non price factors influencing
majorly
 Determine very much of a firm’s market
share and its profitability

4. Price
 Only Marketing mix element that produces
revenue
(Product - It must be developed and produced,
Place - facility and transportation costs, and
Promotion - costly anyway )
 Flexible – Marketing mix rather than others
 Changing too much chases away potential
customers and charging too low cuts revenue

5. Common
pricing
mistakes
Fails to reflect changes
Does not account
for the marketing
mix
Is not varied enough
Is too cost oriented

6. Pricing
Decisions
Internal Factors
External Factors

7. Internal Factors Affecting
Pricing Decisions
Marketing
Objectives
Marketing-Mix
Strategy
Costs
Organizational
Considerations

8. Marketing Objectives that
Affect Pricing Decisions
Marketing
Objectives
Survival
Low Prices to Cover Variable Costs and
Some Fixed Costs to Stay in Business.
Current Profit Maximization
Choose the Price that Produces the
Maximum Current Profit, Cash Flow or ROI.
Market Share Leadership
Low as Possible Prices to Become
the Market Share Leader.
Product Quality Leadership
High Prices to Cover Higher
Performance Quality

9. Marketing Mix Variables that Affect
Pricing Decisions
Marketing-Mix
Strategy
Product Design
and Quality
Distribution
Promotion
Non-Price
Factors

10. Types of Cost Factors that
Affect Pricing Decisions
Total Costs
(Sum of the Fixed and Variable Costs for a Given
Level of Production )
Variable Costs
Costs that do vary
directly with the
level of production.
Raw materials
Fixed Costs
(Overhead)
Costs that don’t
vary with sales or
production levels.
Executive Salaries
Rent

11. External Factors Affecting Pricing
Decisions
Market and
Demand
Competitors’ Costs,
Prices, and Offers
Other External Factors
Economic Conditions
Reseller Needs
Government Actions
Social Concerns

12. The Market and Demand Factors that
Affect Pricing Decisions
Pure Competition
Many Buyers and Sellers Who
Have Little Affect on the Price.
Monopolistic Competition
Many Buyers and Sellers Trading
Over a Range of Prices.
Oligopolistic Competition
Few Sellers Each Sensitive to Other’s
Pricing/ Marketing Strategies
Pure Monopoly
Single Seller
Different Types of Markets

13. Demand Curves
Price
Quantity Demanded per Period
A. Inelastic Demand -
Demand Hardly Changes With
a Small Change in Price.
P2
P1
Q1Q2
Price
Quantity Demanded per Period
P’2
P’1
Q1Q2
B. Elastic Demand -
Demand Changes Greatly With
a Small Change in Price.

14. Pricing Approaches

15. Cost based pricing
 Add a markup to the cost base to determine
a prospective selling price
 Usually it is only a starting point in the price
setting process
 The markup is somewhat flexible, based
partially on customers and competitors
 Because a markup is added, cost based
pricing is often called as cost plus pricing,
where the plus refers to markup component.

16. Minimizes
Price
Competition
Why is it Popular?
Perceived
Fairness to
Both Buyers
and Sellers
Sellers Are More
Certain About
Costs Than
Demand

17. Cost based pricing
 Advantages
 Requires minimum information
 Involves simplicity of calculation
 Insures sellers against the unexpected changes in
costs
 Disadvantages
 Ignores price strategies of competitors
 Ignores the role of customers

18. Example
 The unit variable cost is $47, fixed costs are
$500,000, and volume is 20,000 units, intends a
20% mark-up on sales
 = (VC+FC)/Volume
 = ((47*20000)+500000)/20000
 Cost per unit = $72.
 If a 20% mark up sales is used :
Price = COST/(1-DESIRED MARK UP)
= 72/(1-0.2)
= $90

19. Target Return Pricing
 Cost-oriented methods for setting price of the
product.
 Here, the firm determines that level of price at which
it can yield the target return on investment.
 Here, return on investment is taken as a base for
price determination.
 Attempts are made to recover the cost of
investment.
 Mostly, governmentCompanies, public utilities,
cooperative societies, and the similar organisations
fix pricing for their products on this basis to ensure
minimum return on investment.

20. Example
 Jai Hind Private Limited company expects to
sell 10000 school bags of premium quality in
the current year. Fixed costs allocated to this
line is Rs. 5, 00000.Variable costs estimated
for each bag is Rs. 100.Total investment
(covering development, production and
marketing) on this line is Rs. 50, 00000.
Company wants 20% return on investment.

21.  Return on Investment (ROI) = Rs. 5000000 x 20% = Rs. 1000000
 Costs per unit = variable cost per unit + fixed cost per unit
= Rs. 100 + (Rs. 500000 ÷ 10000 units)
= Rs. 100 + Rs. 50
= Rs. 150.
 Target return (profit) per unit
= Rs. 1000000 / 10000 units
= Rs. 100.
 Selling price per unit = cost of product + Return on Investment.
= Rs. 150 + 100
= Rs. 250.
 If company wants to earn 20% ROI (Return on Investment), the
selling price should be Rs. 250. If ROI is more, definitely selling price
will go up and vice versa.
 This method can be used only when company is capable of
estimating accurately the sales, variable costs, and fixed costs.The
price so determined will be meaningful only if the company can
achieve expected sales.

22. Break-even Analysis Method
 Some companies set the price for their products
by Break-Even Analysis (BEP method).
 It is a managerial tool that establishes
relationship among costs, volume of sales, and
profits. It is also known as cost-volume-profit
analysis.
 It involves developing tables and/or charts that
help a company to determine at what level of
sales, the revenue will be equal to the total costs.
 Under this method, attempts are made to find
out volume of sales at which total costs are just
equal to the sales revenue.

23. Contd…
 This is such a level of sales at which there is no
profit, no loss.
 Sales Revenue =Total Costs.
 This level is called BEP (break-even point), at
which the firm has neither profits nor losses.
 The firm just covers its total costs. When sales
revenue exceeds the total costs, the result is
profit; and when sales revenue is less than total
costs, the result is loss.
 Thus, BEP is the position of sales at which sales
revenue is just equal to total costs.

24.  Hindustan Products Pvt. Ltd. gives following
details:
Selling price is = Rs. 200 per unit.
Variable cost is = Rs. 100 per unit.
Fixed cost is = Rs. 500000.
Contribution is = selling price – variable costs
= (Rs. 200 – Rs. 100)
= Rs. 100
Let’s calculate BEP by using the Formula
BEP = Fixed Cost / Contribution
= Rs. 500000 / Rs. 100
= 5000 units.

25. Competition-Based Pricing
 Going rate pricing
 A firm bases its price largely on competitors price
with less attention to its own costs and demands
 May price at same level , above or below
competition
 Holding on to going rate will prevent price wars

26. Competition-Based Pricing

27. Competition-Based Pricing
 Sealed bid pricing
 It is followed in construction or contract business.
 Here, price is selected on the basis of sealed bids
(quotation or estimated price) for the jobs.
 The firm sets its price on expectations of how
competitors will price the product.
 The firm wants to win the contract requires
submitting the lower price than competitors.
 However, costs and profits are not totally ignored.
The firm cannot set price below the costs.

28. Value based pricing
 Market-oriented method
 price is based on the consumers’ perceived
value of the product.
 Consumers’ views on price are given priority.
 Company takes consumers’ perception of
value as a key to set the price, and not its own
cost and objectives.
 Company tries to measure the views of
buyers regarding price of the product.

29. Set price for the motorbike:
Market Research;
 Buyers respond as under:
 Rs. 30000 if the bike is similar to competitors’ motorbikes
 Rs. 2000 is the price premium for novelty, shape, new getup, and
colour.
 Rs. 3000 is price premium for the highest mileage per litre petrol.
 Rs. 2000 is price premium for replacement guarantee and two
extra free services.
 Rs. 2000 is price premium for durability and reliability.
 Rs. 1000 is price premium for special safety measures.
 Rs. 40000 is the normal price as per consumers’ perception.
 Rs. 2000 discount is for DIWALI special offer.
 Rs. 38000 is final ex-showroom price as per consumers’ views (or
perception).