Pricing Methods notes for I MBA Isemester 1
Pricing objectives or goals give direction to the whole pricing proces...
Pricing Methods notes for I MBA Isemester 2
Methods of Pricing
1. Pricing based on Cost:
a) Cost Plus Pricing :
Pricing Methods notes for I MBA Isemester 3
b) Price Discrimination
Price discrimination is the practice of charging a dif...
Pricing Methods notes for I MBA Isemester 4
includes one big ticket product and at least one complementary good. Bundled p...
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Pricing methods for Managerial Economics

This notes is contain various methods of pricing techniques
Published on: Mar 4, 2016
Published in: Education      

Transcripts - Pricing methods for Managerial Economics

  • 1. Pricing Methods notes for I MBA Isemester 1 Pricing Pricing objectives or goals give direction to the whole pricing process. Determining what your objectives are is the first step in pricing. When deciding on pricing objectives you must consider: 1) the overall financial, marketing, and strategic objectives of the company; 2) the objectives of your product or brand; 3) consumer price elasticity and price points; and 4) the resources you have available. Some of the more common pricing objectives are:  maximize long-run profit  maximize short-run profit  increase sales volume (quantity)  increase monetary sales  increase market share  obtain a target rate of return on investment (ROI)  obtain a target rate of return on sales  stabilize market or stabilize market price: an objective to stabilize price means that the marketing manager attempts to keep prices stable in the marketplace and to compete on non-price considerations. Stabilization of margin is basically a cost-plus approach in which the manager attempts to maintain the same margin regardless of changes in cost.  company growth  maintain price leadership  desensitize customers to price  discourage new entrants into the industry  match competitors prices  encourage the exit of marginal firms from the industry  survival  avoid government investigation or intervention  obtain or maintain the loyalty and enthusiasm of distributors and other sales personnel  enhance the image of the firm, brand, or product  be perceived as “fair” by customers and potential customers  create interest and excitement about a product  discourage competitors from cutting prices  use price to make the product “visible"  help prepare for the sale of the business (harvesting)  social, ethical, or ideological objectives
  • 2. Pricing Methods notes for I MBA Isemester 2 Methods of Pricing 1. Pricing based on Cost: a) Cost Plus Pricing : Cost-Plus: Production costs are determined and then a target profit margin is applied. For example, if a product costs Rs.10 to manufacture, and the business wants to make a 20% profit, the price is Rs.12 per unit. Cost-plus (or “mark-up”) pricing is widely used in retailing, where the retailer wants to know with some certainty what the gross profit margin of each sale will be. An advantage of this approach is that the business will know that its costs are being covered. The main disadvantage is that cost-plus pricing may lead to products that are priced un-competitively. b) Marginal Pricing: Selling at a price that is above the marginal cost but below the total or full cost which includes all overheads. Marginal pricing is based on the assumption that since fixed and variable costs are covered by the current output level, the cost of producing any extra unit (marginal output) will comprise only of variable costs of additional labor and material consumed. 2. Pricing based on Competition: a) Going rate pricing: 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, such as aluminum or steel. b) Sealed bid pricing Sealed-bid pricing is the pricing situation in the tender bid, the companies know their competitors on the basis of pricing. This price is the enterprise of its competitors offer estimates based on certain, with the aim of signing the contract, its bid should be less than the competitors offer. Sealed bids is mainly used for pricing the tender transaction A type of auction process in which all bidders simultaneously submit sealed bids to the auctioneer, so that no bidder knows how much the other auction participants have bid. The highest bidder is usually declared the winner of the bidding process. 3. Pricing based on Demand: a) Perceived value pricing: The valuation of good or service according to how much consumers are willing to pay for it, rather than upon its production and delivery costs. Using a perceived value pricing technique might be somewhat arbitrary, but it can greatly assist in the effective marketing of a product since it sets product pricing in line with its perceived value by potential buyers.
  • 3. Pricing Methods notes for I MBA Isemester 3 b) Price Discrimination Price discrimination is the practice of charging a different price for the same good or service. 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. rice differentiation is distinguished from product differentiation by the more substantial difference in production cost for the differently priced products involved in the latter strategy cladenstine 4. Stratagy based pricing: a) Creaming or skimming In most skimming, goods are sold at higher prices so that fewer sales are needed to break even. Selling a product at a high price, sacrificing high sales to gain a high profit is therefore "skimming" the market. Skimming is usually employed to reimburse the cost of investment of the original research into the product: commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price. This strategy is often used to target "early adopters" of a product or service. Early adopters generally have a relatively lower price-sensitivity - this can be attributed to: their need for the product outweighing their need to economise; a greater understanding of the product's value; or simply having a higher disposable income. it will maximize profits for the better of the company b) Penetration Pricing: A penetration pricing strategy is designed to capture market share by entering the market with a low price relative to the competition to attract buyers. The idea is that the business will be able to raise awareness and get people to try the product. Even though penetration pricing may initially create a loss for the company, the hope is that it will help to generate word-of- mouth and create awareness amid a crowded market category. c) Two parts Pricing: Pricing strategy comprising a fixed (lump-sum) charge that does not vary with usage or consumption and an additional charge that does vary with usage or consumption.Providers of services including banking and finance, telecommunications and transport commonly apply two-part pricing. One reason to set a two-part price is to cover some customer-specific fixed cost, such as the cost of connection in telecommunications or the cost of line rental. d) Bundling pricing: The act of placing several products or services together in a single package and selling for a lower price than would be charged if the items were sold separately. The package usually
  • 4. Pricing Methods notes for I MBA Isemester 4 includes one big ticket product and at least one complementary good. Bundled pricing is a marketing method used by retailers to sell products in high supply. Common examples include option packages on new cars, value meals at restaurants and cable TV channel plans. Pursuing a bundle pricing strategy allows you to increase your profit by giving customers a discount. e) Trasfer pricing Transfer pricing is the setting of the price for goods and services sold between controlled (or related) legal entities within an enterprise. For example, if a subsidiary company sells goods to a parent company, the cost of those goods is the transfer price. Legal entities considered under the control of a single corporation include branches and companies that are wholly or majority owned ultimately by the parent corporation. Certain jurisdictions consider entities to be under common control if they share family members on their boards of directors. It can be used as a profit allocation method to attribute a multinational corporation's net profit (or loss) before tax to countries where it does business. Transfer pricing results in the setting of prices among divisions within an enterprise. f) Cross subsidisation Cross subsidization is the practice of charging higher prices to one group of consumers in order to subsidize lower prices for another group. State trading enterprises with monopoly control over marketing agricultural exports are sometimes alleged to cross subsidize, but lack of transparency in their operations makes it difficult, if not impossible, to determine if that is the case. A strategy where support for a product comes from the profits generated by another product. This is usually done to attract customers to a newly introduced product by giving them a lower price. The low price is sustained by the earnings of another product sold by the same company