UNIT-IV - PRODUCT PRICING Pricing Method and Strategies MANAGERIAL ECONOMICS UNIT-IV - PRODUCT PRICING Pricing Method and Strategies

Dr.V.Prabakaran, AP/MBA - Product Pricing The price of a product or service is the number of monetary units a person pays to obtain one unit of the product or service. Price = Cost + Profit 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Dr.V.Prabakaran, AP/MBA - Product Pricing A company must set its price in relation to the value delivered and perceived by the customer A firm must set a price for the first time when It develops a new product It introduces its regular product into a new distribution channel or geographical area It enters bids on new contract work ( as in Industrial Sale ) Price communicates the value positioning of the product. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Dr.V.Prabakaran, AP/MBA - Product Pricing Pricing Methods Cost Oriented Pricing Competition Oriented Pricing Other Economic Consideration Based Pricing 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Pricing Methods Cost-Oriented Pricing Cost-Plus (or Full cost) pricing Marginal (or Incremental or Direct) cost pricing Cost plus pricing involves adding a certain percentage to cost in order to fix the price. For instance, if the cost of a product is Rs. 200 per unit and the Marketer expects 10 per cent profit on costs, then the selling price will be Rs. 220.  Marginal-cost pricing aim to recover not only the cost of making the product, but enough extra to make one more of the same product. Here the price of the product is equal to sum of variable cost + profit margin. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Pricing Methods Cost-Oriented Pricing Target (or Rate of Return ) pricing Pricing method whereby the selling price of a product is calculated to produce a particular rate of return on investment for a specific volume of production. The target pricing method is used most often by public utilities, like electric and gas companies, and companies whose capital investment is high, like automobile manufacturers. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Competition Oriented Pricing Going rate Pricing Loss Leaders Trade Association Pricing Customary pricing Price Leadership Cyclical Pricing Imitative Pricing and Suggested Pricing Turnover 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Competition-Oriented Pricing 1.Going rate pricing In this, the benchmark for setting prices is the price set by major competitors. If a major competitor changes its price, then the smaller firms may also change their price, irrespective of their costs or demand. The going-rate pricing can be further divided into three sub-methods: a. Competitors ‘parity method: A firm may set the same price as that of the major competitor. b. Premium pricing: A firm may charge a little higher if its products have some additional special features as compared to major competitors. c. Discount pricing: A firm may charge a little lower price if its products lack certain features as compared to major competitors. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Competition-Oriented Pricing 2.Loss leaders A loss leader or leader is a product sold at a low price (i.e. at cost or below cost) to stimulate other profitable sales. This would help the companies to expand its market share as a whole. Widely used in retailing business 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Competition-Oriented Pricing 3.Trade Association pricing To avoid uncertainties of pricing decisions and the downward pressure on prices which competition exerts, firms frequently come to the express or implied agreements to maintain prices at a similar level. There may be possibility that the price cut may spark off a price war between the firms 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Competition-Oriented Pricing 4.Customary Pricing For some commodities the prices get fixed because they have prevailed over a long period of time. Any change in costs for such products gets reflected in quality or quantity of the product rather than its price. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Competition-Oriented Pricing 5.Price Leadership It often happens that in an industry there is one or many big firms whose cost of production is low and they dominate the industry. In that, the Dominant competitor among several, leads the way in determining prices, the others soon following. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Competition-Oriented Pricing 6.Cyclical Pricing When pricing by a firm is based on the assessment of general economic environment, it is known as cyclical pricing. 7.Imitative Pricing Here the firms imitate the price set by other firms. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Pricing Based on other economic considerations 1. Administered prices Administered prices are those that are statutorily determined by the Government. 2.Dual pricing A market where a commodity is covered simultaneously under the administered prices as well as market price is said to have dual prices. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Dr.V.Prabakaran, AP/MBA - Product Pricing Other Pricing Methods 3.Price Discrimination or Differential Pricing Price discrimination is the practice of setting a different price for the same product in different segments of the market. For example, this can be for different classes, such as ages, or for different opening times. 4. Ramsay pricing Frank Ramsay gave a model for taxation, which suggested that the Government should levy high tax on the goods which has low elasticity and low tax on goods that has high elasticity. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Dr.V.Prabakaran, AP/MBA - Product Pricing Other Pricing Methods 5.Transfer pricing Transfer prices are the charges made when a company supplies goods, services or financials to its subsidiary or sister concern. 6. Peak load pricing In Peak load pricing, different prices are charged for same facility used at different points of time by the same consumers. Here, the time zone is divided into peak load and off-peak load pricing. Consumers using the product at peak load may pay high price and consumers using the product at off peak period may pay low price for the facility. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Dr.V.Prabakaran, AP/MBA - Product Pricing Other Pricing Methods 7.Sealed bid pricing There is a separate market in which the buyer does not prefer an open market price but demands that the sellers provide their rates in sealed form, commonly known as tenders. This mode of pricing is called sealed bid pricing. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Dr.V.Prabakaran, AP/MBA - Product Pricing Other Pricing Methods 8.Everyday low pricing (EDLP)In EDLP strategy, a low price is charged throughout the year and none or very few special discounts are given on special occasions. 9.High-low pricing This method involves high prices on a regular basis, coupled with temporary discounts as promotional activity. 10.Value pricing In Value pricing, sellers try to create a high value of the product and charge a low price. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Dr.V.Prabakaran, AP/MBA - Product Pricing Pricing Strategies Stay-out Pricing or Price Skimming : A pricing strategy in which the firm sets a relatively high price for a product at its early stage. When a firm is not certain about the price at which it will be able to sell its product, it starts with a very high price. If it is not able to sell then it lowers the price of its product. It will keep on lowering the price till it is able to sell the targeted amount of the product. This approach helps the firm to ascertain the maximum possible price it can charge from its customers. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Dr.V.Prabakaran, AP/MBA - Product Pricing Price lining Price of one product in the total range of the products is fixed. Price of the rest of the commodities is automatically determined by the relationship between the commodity whose price has been fixed and the rest of the commodities in the range. Eg : If a firm produces shirt fixes a price for a particular size, the rest of the sizes is then fixed simultaneously. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Psychological Pricing Here, a firm fixes the price of its product in a manner which gives the impression of being low. For eg: if the price of the product is fixed at Rs.599 rather than Rs.600, it may have the psychological impact on consumers that the price is in 500’s rather than 600’s. 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

Dr.V.Prabakaran, AP/MBA - Product Pricing Limit Pricing A firm may try to establish a price that reduces or eliminates the threat of entry of new firms into the industry. Penetration Pricing: A pricing strategy in which a firm sets a lower price so as to stimulate demand for the product of the firm and capture a large share of the market. Premium Pricing: High price policy to enhance quality image 03-08-2018 Dr.V.Prabakaran, AP/MBA - Product Pricing

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