PRICING PRACTICES

• Introduction to pricing practices- PRANITHA.G• Cost plus pricing – RIKSHITA JAIN• Marginal or Direct pricing- KIRANDEEP

KAUR• Rate of return & Programme pricing-

PRANITHA.G• Going rate pricing & Loss leaders - ASMA• Trade association & customary pricing -SONAM• Price leadership – PURVA SANGHI• Cyclical pricing- KARISHMA AGARWAL

PRICE ,PRICING & PRICING PRACTICES.

•PRICE: The amount of money expected, required, or given in payment for something.

•PRICING: is the process of determining what a company will receive in exchange for its products.

•PRICING PRACTICES

COST PLUS PRICING

• Price is determined by adding a fixed mark up to the cost of acquiring or producing a product.

cost Mark up Price

CALCULATION OF A COST -PLUS PRICE

Determination of a relevant full cost

Determination of what ‘plus’ the firm adopts.

FORMULA

P = AVC + ATC + PM

P = Price

AVC= Average variable cost

ATC= Average total cost

PM=profit margin

AVC+ATC= FULL COST.

ADVANTAGES:• Simple• Justifiable• Fulfills the objective of profit maximization.• In practice, firms are uncertain about the demand conditions,

so moving away from cost plus may be too risky.

DISADVANTAGES:• Ignores demand.• Ignores competition.• Ignores opportunity cost.• Arbitrary cost allocation.• Ignores price elasticity.

MARGINAL-COST PRICING

The practice of setting the price of a product to equal the extra cost of producing an extra unit of output

This situation usually arises in one of two circumstances:• A company has a small amount of remaining unused production capacity available that it wishes to use; or• A company is unable to sell at a higher price

Advantages of Marginal Cost Pricing• Adds profits• Market entrance• Accessory sales

Disadvantages of Marginal Cost Pricing• Long-term pricing• Ignores market prices. • Customer loss

TARGET OR RATE OF RETURN PRICING

•Revised version of cost plus pricing

•Takes into consideration the demand factors

•They should ensure to maintain either:

1. Fixed percentage markup over cost

2. Profit as a fixed percentage of total sales or

3. Fixed return on existing investment

• METHOD

Example :

•  Assume a firm invests $100 million in order to produce and market designer

snowflakes and they estimate that with demand for designer snowflakes

being what it is, they can sell 2 million flakes per year. Further, from

preliminary production data they know that at that level of output their

average total cost (ATC) is $50 per flake. Total annual costs would be $100

million (2 million units at $50 each). Next, management decides they want a

20% return on investment (ROI). That works out to be $20 million (20% of a

$100 million investment). Profit margin will need to be $10 dollars per flake

($20 million return over 2 million units). So the price must be set at $60 per

designer flake ($50 costs plus $10 profit margin)

Advantages :

• Easy and convenient for a firm to adopt

• Fulfills the objective of profit maximization

• Reduces the cost for decision making

• in ROR pricing full cost is based on normal output and cost

• in ROR pricing mark up is based on expected or planned rate

of return on investment.

Programme pricing:

• In this the price is related to supply price. In order to

cover the own cost and profit margin, a mark up is put

over the supply price. This supply price may be the

wholesale price or that of goods at the go-down.

• This is quite popular in wholesale and retail trade.

GOING RATE PRICING• Setting a price for a product or service 

• Prevailing market price as a basis.

• Homogeneous products 

• Example - aluminum or steel.

Going rate pricing is most likely to occur where:

• There is a degree of price leadership taking place within a particular market

• Businesses are reluctant to set significantly different prices because of the risk of

setting off a price war, which would reduce profits to all firms

• There is a degree of collusion taking

• Place between firms

LOSS LEADER PRICINGCharacteristics of loss leaders

• A loss leader may be placed in an inconvenient part of the store, so that purchasers

must walk past other goods which have higher profit margins.

• A loss leader is usually a product that customers purchase frequently—thus they are

aware that its unusually low price is a bargain.

• Loss leaders are often scarce, to discourage stockpiling. The seller must use this

technique regularly if he expects his customers to come back.

• The retailer will often limit how much a customer can purchase.

• Some loss leader items are perishable and cannot be stockpiled.

TRADE ASSOCIATION PRICING:

To avoid uncertainties of pricing decisions and the downward pressure on prices

which competition exerts, firms frequently come to express or implied agreements to

maintain prices at similar level.

Individual firms may find it worthwhile to break out of any agreements , but this may

lead to the following possible alternatives:

1) The price cut may spark off a price war

2) If the firm breaking out of the collusion is able to keep its rival in the dark about

the price-cut.

WHAT IS 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. EX: coffee,Chocolates

PROBLEMS OF CUSTOMARY PRICING:

• The market grows accustomed to paying a certain amount for a type of product

• Increasing the price beyond this amount will cause sales to drop dramatically

PRICE LEADERSHIP

“Situation in which a market leader sets the price of a product or

service, and competitors feel compelled to match that price.”

• Price leader

• Largest firm

• Difference in their prices

• Positive

• Undisputed market leaders

• Inefficient firm

• Reasons

TACTICS:

• Price changes(infrequent)

• Communications

• Limit pricing

• Price wars

FORMS OF PRICE LEADERSHIP MODEL:• Barometric price leadership

• Price leadership by the dominant firm

• Price leadership by a low cost firm

• Exploitative or aggressive price leadership

CYCLICAL PRICING

It refers to the pricing by a firm depending on

an assessment of general economic

environment i.e. recession or depression.

CYCLICAL PRICING POLICIES

• Price rigidity• Cost changes• Fluctuations due to substitutes• Market share• Demand fluctuations• General price index