Product Pricing

product cost Product cost is the cost of direct labour, direct materials, and manufacturing overhead that are consumed to create a product. Product cost can also be considered the cost of the labour required to deliver a service to a customer. Product cost can be recorded as an inventory asset if the product has not yet been sold. It is charged to the cost of goods sold as soon as the product is sold (see the Matching Principle), and appears as an expense on the income statement.

Value of a product The value product (VP) is an economic concept formulated by Karl Marx  Its annual monetary value is approximately equal to the netted sum of six flows of income generated by production: Wages & salaries of employees. Profit including distributed and undistributed profit. Interest paid by producing enterprises from current gross income Rent paid by producing enterprises from current gross income, including land rents. Tax on the production of new value, including income tax and indirect tax on producers. fees paid by producing enterprises from current gross income, including royalties, certain honorariums and corporate officers' fees, and certain leasing fees incurred in production and paid from current gross income.

Market economics A market economy is an economy in which the prices of goods and services are determined in a free price system In the real world, market economies do not exist in pure form, as societies and governments regulate them to varying degrees rather than allow full self-regulation by market forces. The term free-market economy is sometimes used synonymously with market economy. Where A free market is a competitive market where prices are determined by supply and demand.

Demand Demand is defined as desire backed by willingness and ability to pay. Individual demand: Single entity’s demand Market demand: Sum total of individual demand function

Law of Demand The demand for a commodity increases when its price decreases and falls when falls when its price rises , other things remaining constant Factors behind the law of demand Substitution effect Income effect

supply Supply during a period of time means the quantities of goods which are offered for sale at particular prices. It may be defined as the amount of that commodity which the producer are willing to offer for sale at a particular price during a certain period of time.

Law of Supply Other things remaining unchanged, the supply of a commodity expands with a rise in its price and contracts with a fall in its price. Example : TAMIFLU AND N95 in swine flu

Price sensitivity Price elasticity of demand : Price Elastic products: personal care like soaps, shampoos etc Price inelastic products : daily food items, medicines

Cost output relationship In short run Output has no impact on cost But in long term Cost decreases if output increases Point of output at which cost is minimum is called as economies of scale

Profit Profits are the difference between revenues and costs. In a trade transaction, profit is the difference between the price at which you sell a good and the price at which you bought it. Running a business, net profit is what is left out of turn- over after paying suppliers, workers, financing institution, and the state. And the management decisions intended to achieve stable and desirable profits is known as profit management.

5/18/2018 Pricing Decisions

To a customer, it represents a monetary sacrifice. 5/18/2018 What is Pricing – To a manufacturer – pricing represents the quantity of money, received by the firm or seller for its product. To a customer, it represents a monetary sacrifice. Quantity of money received by the seller PRICE = ---------------------------------------------------------- Quantity of goods & services received by buyer In this equation both the parts are important for price decisions.

Points to learn How to set the price of a new product/ service How to adapt the price How to respond to competitors price change

Changing paradigms…. Traditional view negotiation between seller & buyer Setting one price for all relatively new concept Role of Internet Price a major determinant of the buyers choice More access to information

Common pricing mistakes Too cost oriented Price is not revised often Price is seen as independent of the other elements of marketing mix Price is not varied enough.

How companies price Small companies- Person in charge Large companies- Division & product line managers which is in sink with the pricing objectives set by the top management. Industries where pricing is key factor (petroleum, aerospace etc) – Pricing department

5/18/2018 Pricing Pricing( a complex task) : There is a science side & art side to it

Factors influencing pricing 5/18/2018 Factors influencing pricing Internal factors Corporate objective The image sought Nature of the product Stage in the plc Usage pattern Cost of manufacturing Extent of differentiation Other elements of the marketing mix

Factors influencing pricing 5/18/2018 Factors influencing pricing External factors Market characteristics Price elasticity of the demand Buying behavior of the customer Bargaining power of supplier/customer Competitors pricing Government control Price cartels

Pricing Framework Demand Government policy Corporate objective Price 5/18/2018 Pricing Framework Demand Government policy Corporate objective Price Competitor reactions Barriers in industry like technology Exit barrier Costs

Pricing Methods Cost based pricing Mark up pricing 5/18/2018 Pricing Methods Cost based pricing Mark up pricing Absorption cost pricing Target rate of return pricing Marginal cost pricing 2) Demand based pricing What the traffic can bear pricing Skimming pricing Penetration pricing

Pricing Methods 3) Competition oriented pricing Premium pricing 5/18/2018 Pricing Methods 3) Competition oriented pricing Premium pricing Discount pricing Going rate pricing 4) Tender pricing 5) Affordability pricing 6) Differentiated pricing

Selecting a Pricing Methods 5/18/2018 Selecting a Pricing Methods Mark up pricing – the total cost of production is estimated & a mark up or the margin that the firm wants is further added: Unit cost = Variable cost + Fixed Cost Unit Sales Mark up price = Unit cost (1- Desired return on sales ) Easy to determine the cost Price tends to be similar Fair to both seller & buyer

Selecting a Pricing Methods 5/18/2018 Selecting a Pricing Methods Target return Pricing – Determining the price which would yield the target return on investment : Target return price = Unit cost + Desired return * Invested capital Unit Sales

Customer-oriented or perceived value pricing 5/18/2018 Customer-oriented or perceived value pricing (i) Acquisition value and (ii) Transaction value Acquisition value of a product: ------------------------------------------ Transaction value determined by comparing buyer’s reference price to actual price To measure perceived value, a marketer may use any of the following methods: Direct price rating method Direct perceived value rating Diagnostic method Economic value to the customer Perceived benefits Perceived sacrifice

THANK YOU -PHARMA STREET