Description
This ppt explain pricing strategies and different topics like cost plus pricing, administered pricing, ethical pricing, going rate pricing, experimental pricing, pioneering pricing, marginal cost pricing.
Pricing Methods
? The firm’s overall objectives serve as guiding principle to pricing. ? The following are the commonly adopted major pricing objectives of a business firm— 1. Survival 2. Rate of Growth and Sales Maximization 3. Market Share 4. Target Rate on Investment 5. Preventing Competition 6. Making Money 7. Service Motive 8. Regular Income 9. Price Stabilization
1
Pricing Methods
? Survival –A firm is always interested in its continued survival first. For the sake of assuring continued existence, generally, a firm is ready to tolerate all kinds of ups and down in product lines. ? Rate of Growth and Sales Maximization - A firm may be interested in setting a price policy which will permit a rapid expansion of the firm’s business and its sales maximization. ? Market shares- By adopting a price policy the firm may wish to capture a larger share in the market and acquire a dominating leadership position. In oligopoly market this is quite common.
2
Pricing Methods
? Target rate of Investment - The firms may have a predetermined target return of their investment, for instance say 10%. ? Preventing Competition - In pricing its product, the firm may keep an eye on rival’s entry. So, it may fix up the price such that would prevent competition. ? Making Money - Some firms are interested in making a fast buck taking their monopoly advantage into account and try to sell their goods at premium. Thus, pricing objective may be of making money. ? Service Motive - firm may set pricing policy such as to serve the community and improve its welfare.
3
Pricing Methods
? Regular Income - Some firms are interested in maintaining regular flow of income, so would set their price policy accordingly. ? Price stabilization - The firm may be generally interested in keeping their prices stable within certain range over period of time, irrespective of marginal changes in demand and costs.
4
Cost-plus Pricing
?Cost plus pricing is the most commonly adopted method. Under this method cost of product is estimated and a margin of some kind of profit is added on the basis of which the pricing is determined. ?Empirical evidences have shown that a majority of the business firms usually set prices for their products on the basis of cost plus a fair profit percentage.
5
Cost-plus Pricing
Cost plus Pricing = Cost + Fair Profit ?Cost plus pricing is essentially Mark-up pricing in practice. It is determined by adding a percentage to the average cost of the product. Thus: Price = AC + Mark-up ?Mark-up measured as X%. It is also referred to as contribution margin
6
Cost-plus Pricing
?For example, a firm’s AC is Rs. 50 and contribution margin (X%) is 10% (thus 0.1 of 50 = Rs. 5) ?Therefore; P = 50 + 5 = Rs. 55 ?In practice however, cost-plus pricing method is regarded as more suitable when the producers are uncertain about the market demand for their products and would prefer stability when rivals price strategies are unknown.
7
Shortcomings of Cost-Plus Pricing Methods
? It completely ignores consumer’s preference and demand. ? It has thus one sided approach. It takes only costs and firm’s profit margin into account. ? It does not take into account the effects of competition. ? It ignores rival’s reaction in prescribing a price for the firm’s product. ? It over stresses the precision of allocated costs. In practice, however, cost allocation lacks precision ? It ignores the significance of incremental costs in pricing decision.
8
Administered Pricing
?According to the Indian economist like L. K. Jha and Malcolm Adiseshiah, an administered price for a commodity is the one which is decided and arbitrarily fixed by the government. It is not allowed to be determined by the free market forces of demand and supply. ?Administered prices in a market economy are the results of government intervention. They are prescribed by the government rather than determined by the market mechanism.
9
Ethical Pricing
?When the firms help the government in carrying out socio-economic programme like supply of medicine or school books or nutrition’s food etc., they follow the principle of Ethical pricing, i.e., reasonableness of pricing that would create a good image of the firm.
10
Going- Rate Pricing
?It emphasis the market conditions. The firm does have control over its own price and output. ?Where a price leader exists and he charges a price in keeping with what the followers are charging. ?A firm may accept a certain price as a going rate price and then adjust its costs by providing for a certain margin of profits.
11
Experimental Pricing
?In search of an optimum price, the firm takes some cognizance of the demand for the product, and proceeds, to fix a price by a trial and error method. This is experimental pricing. Usually a sample of test markets is selected, and price is varied to see the reactions. These reactions are observed and then a price that maximizes profits is fixed. ?This method is used for launching new products.
12
Pioneering Pricing
?Every product has a life-cycle: a product is new, it clicks and gets established, but after sometime stagnation and decline phases follow. Once this fact is accepted two possible approaches emerge for a pioneering price. They are— ?Skimming Price. ?Penetration Price.
13
Pioneering Pricing Y
Skimming Price
Price
Penetration Price
0
X
14
Pioneering Price
1. Skimming Price— The entry of a new product into the market is usually preceded by a great deal of research and promotional expenditure. For a new product, the demand initially is not likely to be price-elastic. A firm can decide to skim the cream of the market by charging a high price. Subsequently price can be reduced to reach lower income customers.
15
Pioneering Price
2. Penetration Price—
Alternatively a firm can begin by charging a very low price to penetrate the market. In the short-run the firm may make losses, but in the long-run profits can be earned. This is because, after capturing a large part of the market, the firm can gradually raise the price. Where large-scale production is likely to reduce costs considerably, this policy is helpful.
16
Profit- making Pricing
? Pricing is done to generate surplus after absorbing all costs. This is done to finance future development. Many developing countries assign important role of public sector for generating profits and surplus, as the other sources of resource mobilization reach their limit. Most of the financial requirement of the state in socialist countries is met through surplus generated by the public sector. In the absence of adequate surplus generation in the public sector, people will have to bear more taxes, greater deficit financing and slow growth.
17
Marginal Cost Pricing
?Here, the firm does not consider the fixed costs as the fixed costs might have been recovered earlier from the all the previous units sold. ?To make the selling price more competitive, the firm considers only the marginal costs as the cost of production and quotes the rate which is always lower than the competitors.
18
Transfer Pricing
?In International Business, when a firm has to export semi finished goods to some other country when the importing firm is the subsidiary of the same company, it uses transfer pricing. ?The price is deliberately quoted at a much lower level, so that the import / export duties are calculated on the lower prices thereby benefiting the firm.
19
Price Discrimination
? A Monopoly can discriminate between different buyers be charging them different prices because it has control over the price and customers have no choice. ? It is a situation when a firm charges different prices for the same product when the difference in price is not based on the difference in costs. The cost curves of the firm are same but the demand and revenue curves are different.
20
First Degree Price Discrimination
? This is a situation where a Monopolist charges a different price for each customer for each unit separately. ? Eg. In a town, if there is only one cardiac surgeon, he may charge different rates from different customers, may be based on their paying capacity, for a bypass surgery. ? Here the Marginal revenue curve itself is the Demand Curve. The equilibrium output is where the price charged for the last successive unit is equal to the marginal cost of that unit.
21
Second Degree Price Discrimination
? Here, the monopolist charges different prices for different batches or blocks of units of the same product. ? Eg. A monopoly electric company can charge one rate per unit for the first 1000 units and then decrease the rate per unit for the subsequent batches of 500 units. ? Here, the per unit price remains the same for all the units in one batch and changes batchwise.
22
Third degree Price Discrimination
? Here, the monopoly firm divides the entire market into two or more different groups and charges a different price for each different group. ? Eg. Indian Railways has different charges for senior citizens, kids below 12 years, cancer patients, sports teams etc. ? Electric companies have different rates for farmers, commercial users, domestic users etc.
23
doc_993366997.ppt
This ppt explain pricing strategies and different topics like cost plus pricing, administered pricing, ethical pricing, going rate pricing, experimental pricing, pioneering pricing, marginal cost pricing.
Pricing Methods
? The firm’s overall objectives serve as guiding principle to pricing. ? The following are the commonly adopted major pricing objectives of a business firm— 1. Survival 2. Rate of Growth and Sales Maximization 3. Market Share 4. Target Rate on Investment 5. Preventing Competition 6. Making Money 7. Service Motive 8. Regular Income 9. Price Stabilization
1
Pricing Methods
? Survival –A firm is always interested in its continued survival first. For the sake of assuring continued existence, generally, a firm is ready to tolerate all kinds of ups and down in product lines. ? Rate of Growth and Sales Maximization - A firm may be interested in setting a price policy which will permit a rapid expansion of the firm’s business and its sales maximization. ? Market shares- By adopting a price policy the firm may wish to capture a larger share in the market and acquire a dominating leadership position. In oligopoly market this is quite common.
2
Pricing Methods
? Target rate of Investment - The firms may have a predetermined target return of their investment, for instance say 10%. ? Preventing Competition - In pricing its product, the firm may keep an eye on rival’s entry. So, it may fix up the price such that would prevent competition. ? Making Money - Some firms are interested in making a fast buck taking their monopoly advantage into account and try to sell their goods at premium. Thus, pricing objective may be of making money. ? Service Motive - firm may set pricing policy such as to serve the community and improve its welfare.
3
Pricing Methods
? Regular Income - Some firms are interested in maintaining regular flow of income, so would set their price policy accordingly. ? Price stabilization - The firm may be generally interested in keeping their prices stable within certain range over period of time, irrespective of marginal changes in demand and costs.
4
Cost-plus Pricing
?Cost plus pricing is the most commonly adopted method. Under this method cost of product is estimated and a margin of some kind of profit is added on the basis of which the pricing is determined. ?Empirical evidences have shown that a majority of the business firms usually set prices for their products on the basis of cost plus a fair profit percentage.
5
Cost-plus Pricing
Cost plus Pricing = Cost + Fair Profit ?Cost plus pricing is essentially Mark-up pricing in practice. It is determined by adding a percentage to the average cost of the product. Thus: Price = AC + Mark-up ?Mark-up measured as X%. It is also referred to as contribution margin
6
Cost-plus Pricing
?For example, a firm’s AC is Rs. 50 and contribution margin (X%) is 10% (thus 0.1 of 50 = Rs. 5) ?Therefore; P = 50 + 5 = Rs. 55 ?In practice however, cost-plus pricing method is regarded as more suitable when the producers are uncertain about the market demand for their products and would prefer stability when rivals price strategies are unknown.
7
Shortcomings of Cost-Plus Pricing Methods
? It completely ignores consumer’s preference and demand. ? It has thus one sided approach. It takes only costs and firm’s profit margin into account. ? It does not take into account the effects of competition. ? It ignores rival’s reaction in prescribing a price for the firm’s product. ? It over stresses the precision of allocated costs. In practice, however, cost allocation lacks precision ? It ignores the significance of incremental costs in pricing decision.
8
Administered Pricing
?According to the Indian economist like L. K. Jha and Malcolm Adiseshiah, an administered price for a commodity is the one which is decided and arbitrarily fixed by the government. It is not allowed to be determined by the free market forces of demand and supply. ?Administered prices in a market economy are the results of government intervention. They are prescribed by the government rather than determined by the market mechanism.
9
Ethical Pricing
?When the firms help the government in carrying out socio-economic programme like supply of medicine or school books or nutrition’s food etc., they follow the principle of Ethical pricing, i.e., reasonableness of pricing that would create a good image of the firm.
10
Going- Rate Pricing
?It emphasis the market conditions. The firm does have control over its own price and output. ?Where a price leader exists and he charges a price in keeping with what the followers are charging. ?A firm may accept a certain price as a going rate price and then adjust its costs by providing for a certain margin of profits.
11
Experimental Pricing
?In search of an optimum price, the firm takes some cognizance of the demand for the product, and proceeds, to fix a price by a trial and error method. This is experimental pricing. Usually a sample of test markets is selected, and price is varied to see the reactions. These reactions are observed and then a price that maximizes profits is fixed. ?This method is used for launching new products.
12
Pioneering Pricing
?Every product has a life-cycle: a product is new, it clicks and gets established, but after sometime stagnation and decline phases follow. Once this fact is accepted two possible approaches emerge for a pioneering price. They are— ?Skimming Price. ?Penetration Price.
13
Pioneering Pricing Y
Skimming Price
Price
Penetration Price
0
X
14
Pioneering Price
1. Skimming Price— The entry of a new product into the market is usually preceded by a great deal of research and promotional expenditure. For a new product, the demand initially is not likely to be price-elastic. A firm can decide to skim the cream of the market by charging a high price. Subsequently price can be reduced to reach lower income customers.
15
Pioneering Price
2. Penetration Price—
Alternatively a firm can begin by charging a very low price to penetrate the market. In the short-run the firm may make losses, but in the long-run profits can be earned. This is because, after capturing a large part of the market, the firm can gradually raise the price. Where large-scale production is likely to reduce costs considerably, this policy is helpful.
16
Profit- making Pricing
? Pricing is done to generate surplus after absorbing all costs. This is done to finance future development. Many developing countries assign important role of public sector for generating profits and surplus, as the other sources of resource mobilization reach their limit. Most of the financial requirement of the state in socialist countries is met through surplus generated by the public sector. In the absence of adequate surplus generation in the public sector, people will have to bear more taxes, greater deficit financing and slow growth.
17
Marginal Cost Pricing
?Here, the firm does not consider the fixed costs as the fixed costs might have been recovered earlier from the all the previous units sold. ?To make the selling price more competitive, the firm considers only the marginal costs as the cost of production and quotes the rate which is always lower than the competitors.
18
Transfer Pricing
?In International Business, when a firm has to export semi finished goods to some other country when the importing firm is the subsidiary of the same company, it uses transfer pricing. ?The price is deliberately quoted at a much lower level, so that the import / export duties are calculated on the lower prices thereby benefiting the firm.
19
Price Discrimination
? A Monopoly can discriminate between different buyers be charging them different prices because it has control over the price and customers have no choice. ? It is a situation when a firm charges different prices for the same product when the difference in price is not based on the difference in costs. The cost curves of the firm are same but the demand and revenue curves are different.
20
First Degree Price Discrimination
? This is a situation where a Monopolist charges a different price for each customer for each unit separately. ? Eg. In a town, if there is only one cardiac surgeon, he may charge different rates from different customers, may be based on their paying capacity, for a bypass surgery. ? Here the Marginal revenue curve itself is the Demand Curve. The equilibrium output is where the price charged for the last successive unit is equal to the marginal cost of that unit.
21
Second Degree Price Discrimination
? Here, the monopolist charges different prices for different batches or blocks of units of the same product. ? Eg. A monopoly electric company can charge one rate per unit for the first 1000 units and then decrease the rate per unit for the subsequent batches of 500 units. ? Here, the per unit price remains the same for all the units in one batch and changes batchwise.
22
Third degree Price Discrimination
? Here, the monopoly firm divides the entire market into two or more different groups and charges a different price for each different group. ? Eg. Indian Railways has different charges for senior citizens, kids below 12 years, cancer patients, sports teams etc. ? Electric companies have different rates for farmers, commercial users, domestic users etc.
23
doc_993366997.ppt