PRICING

Maxwell Ranasinghe
B.Sc. ( Business Administration) Hons. MAAT, Attorney at Law, CPM ( New Haven- USA)

PRICING
IMPORTANCE OF PRICING PRICING OBJECTIVES FACTORS TO CONSIDER IN PRICING CONCEPTS OF COSTING FOR PRICING PRICING STRATEGIES SETTING THE FINAL PRICE

Pricing the revenue maker

The Price is the amount of money, goods or services that must be offered to get a product ( sum of all the values that consumers exchange for the benefit of having or using the product or service) Price is expressed in different terms such as Rent, Tuition fees, fare, interest, premium, salary, taxes and commissions

Role and importance of pricing

- it generates income - it influences buyer - it is the most flexible - it could lead to gain or loose market - Customers often equate price with quality - Price connects customers and sellers at the point of exchange - Customers often use price to compare competing products - for certain products price could be main criteria in selection

Pricing Objectives
Financial Objectives
Profit - Return of investment - Profit maximisation Cash Flow

Sales and Marketing Objectives

Market Share and Positioning Volume of sales Status Quo

Survival ( cover expenses in short run)

Factors to be considered in pricing

Cost of the product Customers Channel requirements Competitors Compatible with objective of the company & other Ps of M Mix Legal aspects Principals of Taxation

Pricing should be in line with other elements of the marketing mix

The positioning of the product Quality of the product Distribution Promotion Persons involved in the product Processes adopted Physical evidence

Concepts of Setting Prices

Price Sensitivity- The general trend is that people are
sensitive to prices on items that are purchased regularly and the items that cost a lot. They are less sensitive to prices that they do not buy regularly and to the items that cost less.

Estimating Demand Curves- This will allow the

marketer to find out demand at different levels of pricing, charge different prices at different markets, offer discounts at selected
outlets to find out the demand.

Price Elasticity of Demand- The percentage of

demand that changes with the percentage of change in the price is elasticity of the demand. If price changes 10% and the demand changes at a higher rate ( e.g.. 20%) then the demand is elastic. If the price changes 10% and the demand changes at a lower rate ( e.g. 5%) then the demand is inelastic

Concepts of costing for pricing

Cost and Levels of production- There are three types of cost that is Fixed Cost( FC) ,Variable Cost (VC) and Total Cost (TC) Fixed Cost (FC) does not change with the increased production egg. Rent, Rates and Loan Interest. E.g. Monthly rent Rs. 100,000 will have to pay even if there is no production or even if there is a production of 10,000 units Variable Cost (VC) The cost that changes with the increased production. E.g.. Raw materials Total Cost ( TC) The sum of the FC and the VC

 Contribution
Contribution is the amount that contributed by sales to recover the Fixed Cost when Variable Cost is deducted from the Sales Price. Selling Price (Rs. 40) Variable Cost ( Rs. 15)= Contribution (Rs. 25) So the contribution will help a firm to find out many important aspects such as Break Even Point, how many should be manufactured to earn a given amount of profits etc,.

Costing Formulas
Fixed Cost (FC) Selling Price (SP) Contribution per unit (CPU)= SP-VC Break Even Point= Income=Total Expenses( No profit or loss) Units to BEP= FC/CPU Units to Expected profit= FC+Profit/CPU

Cost and Prices

A garment industry is sewing socks and the cost elements are as follows Fixed Cost Rs. 100,000 Variable Cost Rs. 15 per unit Selling Price is Rs. 40.00 What is the BEP ? If the company wants to earn a profit of Rs. 200,000 how many units it should manufacture ?

Variable cost
Production - Cloths Units meter p/u 0 1.5 1000 1.5 2500 1.5 5000 1.5 6250 1.5 Price Per meter 10 10 10 10 10 Variable Cost

0 15000 37500 75000 93750

Fixed Cost
Units produced Fixed coste.g. rent 0 1000 100000 100000 Total Fixed cost 100000 100000

2500
5000 6250

100000
100000 100000

100000
100000 100000

Total Cost & Income

Units produce d Variable Fixed Total Cost- VC cost FC Cost @ 15 per VC+FC unit Total Income Selling Price Rs. 40.00 0 40000

0
1000

0
15000

100000
100000

100000
115000

2500
5000 6250

37500
75000 93750

100000
100000 100000

137500
175000 193750

100000
200000 250000

BEP REVENUE 4000 units

Rev. 160000

AND COST
250000 200000 150000 100000 50000

COST/REVENUE

VC FC TOTAL REVENUE

2500

5000 UNITS

7500

0 10000

Break Even Point Sale Price Rs. 40.00 Variable Cost Rs. 15.00 Contribution ( 40- 15) Rs. 25.00 BEP = Fixed Cost Contribution BEP = 100000 = 4000 25 Once the BEP is reached all the FC is recovered. Then the contribution becomes a profit. The you can manipulate the pricing in many ways.

 How many items should be manufactured to earn a profit of Rs. 200,000 FC + Profit CPU 100000 + 200000 = 12000 25 40 x 12000 = 480,000 VC 15 x 12000 = 180,000 FC = 100,000 Profit = 200,000

Pricing Strategies
Cost Based (Internal Oriented) Pricing Demand (Market/ Customer) Based Pricing Competitor Based Pricing

Cost or Company Oriented Pricing

Cost plus pricing ( determine the sellers total cost and then add a specified amount of percentage.) Cost 16 add 20% = Cost x 1+.20 = 19.20 Mark-up pricing ( A company may have an idea of what profit it should earn. Therefore after taking all internal cost factors into consideration, this predetermined profit margin from the cost will be added to the cost. It is called the mark up ) . E.g. What would be the price of a product costing Rs. 16.00, if Markup on cost is 20% Mark up on cost : Cost x 1+.20 16 x 3.20 = 19.20 ( results of both are same)

 Margin on sales price pricing The difference in this calculation is that profit margin is based on sales price but the cost of the product is given for calculation Cost Rs. 16.00 calculate the price with a mark up/ margin of 20% on sales

Margin on sales
formula =

cost
1 markup

16 1 (20/100) Rs. 20.00

Customer Oriented Pricing Strategy

Market Skimming ( innovative, inelastic demand, high value, high demand low supply e.g.. celltel) Market Penetrating( mee too products, quick entry into market, greater volume to achieve to get economies of scale, greater market to catch) Psychological ( emotional factor, image, quality e.g.. Bata 99.90 rather than Rs. 100 , Rolex very high price and image)

 Value based ( customer perceived value,

find out how much customers are willing to pay for the product through market research)

Promotional Pricing Strategy ( Cash

rebates- Special event pricing- Loss leader (
setting low prices on certain items and attracting customers and assuming they will by other products at normal prices)- Low Interest Deals Group Pricing

Competitor Oriented Pricing

Competitive bid pricing( matching or improving
over the competitors price. Especially used in Tenders. You need to know the market well and the requirements of the customer well to quote price in this format)

Competitive advantage pricing ( Price may be

the same but you offer additional services E.g. Petrol shed offers free window cleaning for customer who pump petrol in their station)

Setting the final pricing

Cost Other overheads DiscountsCash/Trade in /Quantity Allowances Margins for Channel members Defects replacement cost/ guarantees

 Mark up pricing
This is the most common and elementary pricing system used by many. This could be done in two ways : one by adding a markup on sales price and other by adding a mark up to cost. E.g. What would be the price of a product costing Rs. 16.00, if mark up on sales 20% or Markup on cost is 20% Mark up on sales: Cost 16.00 = 20.00 1- markup 1-.20 Profit = 4.00 Mark up on cost : Cost x 1+.20 16 x 1.20 = 19.20 Profit = 3.90

 Target Return Pricing

If a company wants to earn a specific amount of profit what would be the price that the products should be sold? A company invest Rs. 1,000,000 and it wants to earn a profit of 20% on the investment ( Return On Investment= ROI). The Total Cost of the product is Rs. 16 and the amount to be sold is 50,000 units. What would be the price ? The profit expected is 1,000,000 x20% = 200,000 You are going to sell only 50,000 units So one unit should earn a profit of Rs.= 200,000 = Rs. 4.00 50,000 Selling price = Cost + Profit Therefore the selling price = 16.00 + 4.00 = 20.00

 Perceived value Pricing

Perceived value is the customers price. What is the estimate of the value of the product. BMW car may fetch higher value than a Toyota in the customers mind Lux may fetch a higher price than the other local soaps Therefore pricing can be made based on this value

Value Pricing
Value pricing is fixing a lower price for good quality products. It is called value for money pricing . E.g.. House of Fashion

 Group Pricing Companies offer special prices when a group of buyers intend buying products. Singer and Abans are using this type of pricing by visiting work places of their customers. They usually collaborate with Welfare Societies of employees and arrange these kind of sales and offer better prices and terms. They call it Group Sales for these type of selling.

 Going Rate Pricing

Pricing product at the same level as the competitors prices Lot of vegetables, fish, Gold, Iron, Land in the market are priced on this method

Auction Type Pricing

In order to sell extra stocks and obsolete items this pricing method is used. People tend to think that this price is bargain price.