Professional Documents
Culture Documents
FIXED COSTS
- Depreciation of tools and equipment
- Admin and overhead costs
- Utilities (Electricity, water, communications)
- Repairs and maintenance
- Marketing and distribution costs (as % of total costs)
STAGES OF COSTING
P 144 P 236.49
MAJOR INFLUENCES ON
PRICING DECISIONS
- Customers
- Competitors
- Costs
Influence prices through
CUSTOMERS their effect on demand
1. Organizational objectives
• e.g. to produce quality products – higher price
• e.g. to increase sales by 18% - lower price
3. Distribution channels
• Large – price of the product is high
• Short – price is low
5. Pricing objectives
• Setting the price lower than the competitor to
achieve an increase in market share
• Promos to increase customer’s decisions to buy
6. Product characteristics
• Nature of product, substitute, life cycle
PRICING METHODS
General formula:
Cost base P X
Markup component Y
Prospective selling price P (X + Y)
1. CBP: COST-PLUS PRICING
Cost base P 50
Markup component (50 x 0.25)
Prospective selling price P 62.50
Advantages Disadvantages
- Rapid cost recovery - Ignores current
- Relatively simple demand
- IF used by the entire - Ignores consumer’s
industry, price tends perception of price
to be similar, thus, - Does not consider
competition can be competition
minimized
2. CBP: MARKUP PRICING
General formula:
Prospective P X
selling price 1 – desired return on sales
2. CBP: MARKUP PRICING
P 16
1 – 0.20
Prospective selling price = P 20
P 165
1 – 0.25
Prospective selling price = P 220
General formula:
P 20 + (0.20 x 1,000,000)
50,000
Prospective selling price = P 24
P 80 + (0.18 x 50,000)
625
Prospective selling price = P 94.40
Advantages Disadvantages
- Required minimum - Ignores price
information strategies of
- Simple calculations competitors
- Insures sellers against - Ignores the role of
the unexpected customers
changes in costs
MARKET-BASED
PRICING METHODS
Examples:
vs
vs
2. MBP: VALUE PRICING
Example: TOYOTA
Examples
3. MBP: GOING-RATE PRICING
Advantages
- The only way to set price when costs are difficult to measure
and competitor’s response is uncertain
- A more relevant method
- Brings uniform pricing in the industry while ensuring fair return
to the sellers
- Protects consumers’ from being cheated and misguided
- More options for the consumers at, more or less, the same
price
3. MBP: GOING-RATE PRICING
Disadvantages
- One-sided, only competition factor is considered
- Ignores company’s objectives, costs, qualities, services and
consumers’ perception of value
- It is senseless to follow blindly the leaders or strong
competitors as every firm has its special problems,
opportunities, situations and capabilities
- Temporary pricing of competitors may lead to erroneous
decisions
4. MBP: SEALED BID PRICING
2. Time Pricing
- Prices for the same product depend on the
timing or season
5. MBP: DIFFERENTIATED PRICING
3. Area Pricing
- Same product is
priced differently
in different areas
5. MBP: DIFFERENTIATED PRICING
• Determining demand
2
• Estimating cost
3
1. Profit-oriented objectives
• Maximizing profit
• Achieving a target return
2. Sales-oriented objectives
• Increasing the sales volume
• Increasing or maintaining market share
PRICING OBJECTIVES
4. Discriminatory Pricing
• Depends on intensity of demand, volume,
customer groups (students, senior citizens)
Price-Quality Strategies
Price
High Medium Low
Premium High Super
Product Quality
High
Value Value Value
False
Low Rip-Off Economy
Economy
Price-Reaction Program for Meeting a
Competitor’s Price Cut
No Hold our price at present
Has competitor cut
level; continue to watch
his price?
No competitor’s price
Yes No
Is the price likely to Is it likely to be a
How much has his price
significantly hurt permanent price
Yes Yes cut been?
your sales? cut?