MIT WORLD PEACE UNIVERSITY

T.Y. B. Tech

DIV B

MECHANICAL SYSTEM DESIGN

Group Activity

PRICING OF A PRODUCT

Roll Nos

PB 11: Ashish Vanjani

PB 21: Chinmayee Askhedar

PB 23: Ashish Pandita

PB 35: Mayura Ghatti

PB 37: Mahika Karkhanis

Introduction:

Price is the money that customers must pay for a product or service. In
other words, price is an offer to sell for a certain amount of currency. The
word, offer indicates that price is subject to change if there are found
insufficient number of customers at the original price of the product.
That is why prices are always on trial. If they are found to be wrong,
either they must be immediately changed or the product itself must be
withdrawn from the market.

However, pricing of the product is different from its price. In simple

words, pricing is the art of translating into quantitative terms the value of
a product to customers at a point of time. Whereas price is the final
amount at which the product is sold at a profit.

“In essence, by and large, every facet of our economic life is directly or
indirectly governed by pricing. It is the prime regulator of production,
distribution and consumption of goods.”

One or more of the following may be the objectives of pricing:

1. Rate of return on capital investment

A firm generally fixes a target of return on capital investment. It is a

long-term object in view. The target rate of price fixing has no fixed norm;
it changes with the change of the market conditions. The sole producer
fixes the price which competitive producers cannot.

In a monopoly market, the producer follows the principle of pricing new

products which naturally takes the form of skimming the market. Again,
the producer may adopt penetration pricing policy charging initially low
price with the object in view of earning higher returns later.
2. Stabilisation of price

Keeping the price stable may be the objective of pricing in some cases.
Minor charges in the market conditions are not taken into consideration.
This is done out of apprehension that a little rise in price may bring down
sales and the total return on investment will decline.

Frequent price fluctuation presents difficulty in maintaining stability in

price. When such a situation prevails in the market, short-run fluctuations
in cost and demand are ignored and pricing is based on long-run trends of
cost and productivity.

3. Maintenance of market share

With the object of maintaining or expanding market share, price fixation is

very carefully considered by the top management. Reputation of the firm
in the total share of the market is a deciding factor for which a little push
up of price is considered unwise lest the position of the firm in the total
marketing of the product suffer a setback.

Profitability is sacrificed for enhancing reputation and goodwill of the

firm which ultimately pays.

4. Facing or preventing competition

Competition is a dominant factor in pricing. To face or prevent

competition, pricing is done with utmost caution. Better a less price then
allowing new competitors to enter the market becomes the policy of
pricing when a firm is to face or prevent competition.

Sometimes firms even follow price-cut. This is done to make the position
of the rival firms worse. This is called entry prevention price. This policy,
of course, leads the firm to earn more profit in future and the loss sustained
earlier is more than compensated.

5. Fixation of price on ethical basis

In the changing concept of business, it is not an economic institution

solely for the purpose of earning profit. Social responsibility demands a
firm to charge fewer prices from ethical sense of view.

Basic factors to consider while Pricing a Product:

⚫ Raw Materials

⚫ Machinery

⚫ Labour

⚫ Transport

⚫ Overheads

⚫ Wastage

Raw Materials:

Raw material expenses refer to the cost of the components that go into a
final manufactured product.Raw materials have one of the highest impact
on the price of raw materials. The highest change in pricing of a product
is caused on how easily the raw material is available in the nature. If the
raw materials are easily available and easy to extract at low cost the final
cost of product goes down gradually. However, if the extraction and
availability is difficult it means it requires for labour and machinery
which increases the price of raw materials and hence the final cost of
product.

Machinery:
Every product requires certain machinery big or small to work on the raw
material and get the final product. The sensitivity of machinery its
precision and its finishing on the final product affects deeply on the
pricing of the product. Like if the machine to be used is a heavy
machinery and works on strong metal with high tolerance will thou be
costly in the start won’t have much effect on the finishing. Hence it is ok
that the machine made small mistakes in the tolerance zone so it will not
much increase the pricing of product. However, if we are working on
sophisticated raw material requiring high precision and has low tolerance
level then the machine has to be that much accurate thus the machine will
not only cost more but is also bound to require constant care and
maintenance which in turn will increase the final price of the product.

Labour:

Every industry requires labour for work. And the amount of labour the
work allotted to them and their role in the finishing of the product is what
affects the final price of product. If the workers work on heavy
machinery subjected to higher risks to safety or work on small machines
requiring high skills and precision in the finishing then the salary paid to
them will be high and thus it will increase the cost of the product.
However, if the risk is not high or not much skills are required then their
salary is low which helps lower the price of product.

Transport:

Transport of product firstly includes the transport of raw materials and

then the transport of final product to the general market and also the risks
involved in the transport. If the industry is set far outside the city or has
high risk in transporting like transporting chemicals or nuclear materials
then it requires high safety high security and high skilled driver for
transport thus it will be costly and the final product price will increase.
However, if the industry is near the market and requires not much safety
for transport then it will cost less and will not affect the final price.

Overheads:

Overhead costs, often referred to as overhead or operating expenses,

refer to those expenses associated with running a business that can’t be
linked to creating or producing a product or service. They are the
expenses the business incurs to stay in business, regardless of its success
level. These include stationery, electricity, rent and anything else which
is directly not connected to the manufacturing the product. So for a large
industry the overheads are high and hence the final price is affected.
However for a small industry the overheads are less so it is not included
hence has no effect on the price of the product.

Wastage:

The production and processing of wastage during manufacturing can

have a really high effect on price. If the disposal of waste produce is
difficult or if the wastage is high then the price of product is increased in
order to compensate the same. However, if waste produced is less or is
easily disposed then we need not increase the price of the product.

The pricing decisions for a product are affected by internal and

external factors.

A. Internal Factors:
1. Cost:
While fixing the prices of a product, the firm should consider the cost
involved in producing the product. This cost includes both the variable
and fixed costs. Thus, while fixing the prices, the firm must be able to
recover both the variable and fixed costs.

2. The predetermined objectives:

While fixing the prices of the product, the marketer should consider the
objectives of the firm. For instance, if the objective of a firm is to
increase return on investment, then it may charge a higher price, and if
the objective is to capture a large market share, then it may charge a
lower price.

3. Image of the firm:

The price of the product may also be determined on the basis of the
image of the firm in the market. For instance, HUL and Procter &
Gamble can demand a higher price for their brands, as they enjoy
goodwill in the market.

4. Product life cycle:

The stage at which the product is in its product life cycle also affects its
price. For instance, during the introductory stage the firm may charge
lower price to attract the customers, and during the growth stage, a firm
may increase the price.

5. Credit period offered:

The pricing of the product is also affected by the credit period offered by
the company. Longer the credit period, higher may be the price, and
shorter the credit period, lower may be the price of the product.

6. Promotional activity:
The promotional activity undertaken by the firm also determines the
price. If the firm incurs heavy advertising and sales promotion costs, then
the pricing of the product shall be kept high in order to recover the cost.
B. External Factors:
1. Competition:
While fixing the price of the product, the firm needs to study the degree
of competition in the market. If there is high competition, the prices may
be kept low to effectively face the competition, and if competition is low,
the prices may be kept high.

2. Consumers:
The marketer should consider various consumer factors while fixing the
prices. The consumer factors that must be considered includes the price
sensitivity of the buyer, purchasing power, and so on.

3. Government control:
Government rules and regulation must be considered while fixing the
prices. In certain products, government may announce administered
prices, and therefore the marketer has to consider such regulation while
fixing the prices.

4. Economic conditions:
The marketer may also have to consider the economic condition prevail-
ing in the market while fixing the prices. At the time of recession, the
consumer may have less money to spend, so the marketer may reduce the
prices in order to influence the buying decision of the consumers.

5. Channel intermediaries:
The marketer must consider a number of channel intermediaries and their
expectations. The longer the chain of intermediaries, the higher would be
the prices of the goods.

Certain other Factors that could affect the pricing of product:

⚫ Product cost

⚫ Objectives of Firm

⚫ Competitive situations

⚫ Demand for product

⚫ Customer behaviour

⚫ Government regulations

Product Cost:

The second factor, the most important in determining price, is the cost of
the product itself. While making marketing strategy, the decision makers
should attempt to optimize the cost. The cost optimization helps in
determining reasonable price which provide equitable return on the cost
employed and vise-a-versa suits the customers’ buying power. In order to
optimize the cost of the product, the decision makers should study
different types of cost, viz., fixed cost, variable cost, and incremental
cost.

Objective of Firm:

The objectives set by the firm also influence the prices of its products.
For example, if the firm adopts skimming objectives, then the price
would generally be high. On the contrary, if the firm adopts the market
penetration as its objective, the price would normally be low.

Competitive Situation:

The magnitude of competition existent in the market also affects prices.

If the marketing manager finds that the magnitude of competition is high,
prices tend to be normally high. On the contrary, in the situation of low
competition, the prices would be higher due to favorable market
environment.

If competition exists between the products of the same line with similar
quality, the marketer should also watch the prices of alternative/
substitute products also while determining the prices of the competitive
product.

Demand for Product:

The fact remains that among the various factors, the demand for the
product concern is found exceptionally instrumental in guiding the
pricing decisions. As per the law of demand, if there is more demand for
the product, prices will be high and if there is low demand for the
product, prices will be low. However, essential goods like salt are
exception to this law of demand in affecting the price of the product.
Besides, seasonal nature of demand can also affect pricing policy by
making it possible to alter prices with the high and low seasons of
demand for the product. For example, with high demand for flowers,
fruits, and sweets during Diwali prices increase and decrease during
post-Diwali period.

Customer’s Behaviour:

In making pricing decisions, the study of customers’ behavior bears

significant relevance. Of late, the behavioral scientists have gravitated
increasing attention on the behavioral science. They feel that an in- depth
study of the customers’ behavior would help diagnose the reactions of
the customers regarding a product. While studying consumers, they
should be traced out into specific groups in line with market
segmentation, For example, if the marketing manager has to deal with the
industrial consumer, the pricing decisions would be different. On the
other hand, if he has to deal with the general consumers, the pricing
decisions would be somewhat distinct.

Government Regulations:

While deciding pricing policy, the decision maker does not need to
underestimate the Government regulations imposed from time to time to
control the business activity in the country. Therefore, due weight-age
should be assigned to such regulations like Essential Commodities Act,
Industries Development and Regulations Act (IDRA), and the Defense of
India Rules (DIR).The basic purpose of these regulations is to optimize
and regulate the distribution of consumer goods. For instance, creating
artificial scarcity to raise prices of the products in the case of
Government regulation would be a futile exercise.

The common pricing methods and strategies are discussed below:

Cost-plus Method:
The cost involved in the production of any product becomes the prime
basis for determining its price. This cost-plus method is the commonest
method used for pricing by the small-scale enterprises. According to this
method, firstly, the total costs, i.e., fixed and variables costs are worked
out. Then, a certain margin for profit is added to total costs because the
basic objective of running an enterprise is to earn profits. Now, what sum
comes after is the selling price of the product.

To put it in simple equation:

Total Cost (Fixed + Variable) + Profit = Selling Price

Skimming Pricing:
Under skimming pricing strategy, a Very high price is charged in the
beginning with a view to recover the cost involved within a shorter
period of time. This policy is feasible when the product introduced is
innovative and is used mainly by sophisticated group of customers.
However, the high price is usually supported by heavy promotion.

This policy cannot continue for a long period of time because high price
of the product attracts other manufactures/entrepreneurs also to plunge
into manufacturing. As a result, the competition sets in and the prices
tend to fall.

Penetration Pricing:
This is, in a way, contrary to the skimming pricing policy. Under this
policy, the price of the product is set at a lower level to penetrate into the
market. The underlying idea is to attract as many customers as possible at
the very outset. This policy can be adopted when the customers are very
particular for price and when the product is an item of mass consumption.
Once the product is accepted in the market, the price of the product is
gradually increased.

Market Rate Policy:

This policy adopts the prevailing market rates for determining the price
of the product, this method is used when the product is indistinguishable
from those of the competitors. This method is also used in case of
unbranded products like oils, courier, tailoring and repairing/servicing.

Variable Price Policy:

Under this policy, the price of the same product varies from customers to
customers depending upon the situations prevailing in the market. This
method is adopted with an objective to maximize the profits.

The following are some market situations when the entrepreneurs

adopt the variable price policy:
(i) There is difference in the size of customers (e.g. a lower price may be
offered to bulk customers).

(ii) There is a difference in the demand and supply powers between the
locations.

(iii) There is a difference in the bargaining powers of various customers.

(iv) There is a difference in the customers’ ability to pay for the same
product.

(v) There is a difference in the knowledge of customers’ about the

market price of the product.

Resale Price Maintenance (RPM):

Under this policy, the manufacturers of the product fix prices for the
wholesalers and retailers. The retail prices of the product like drugs and
detergents are printed on the packages. However, the retail price is fixed
somewhat higher to meet the cost of inefficient retailers not selling the
goods timely. Its disadvantage is that it deprives of the customers from
the advantage which may accrue to them through competition.

CASE STUDY 01

GOWNS

Average Cloth Cost = Rs. 70/m

1 Night Gown requires almost 3 meter

Hence, total Raw material cost is Rs. 210/- for one Gown
Transport Charges are considered to be almost 1% for each gown.
Hence, Cost of one Gown after transport and raw materials is almost: Rs.
212.1 /-

Making charges are almost Rs. 60/- per gown for a basic design
Making charges are almost Rs. 70/- per gown if it has high design like
embroidery

Assuming a plain design gown the average cost now goes to almost: Rs.
272.1/-

Wastage:
We consider almost 5% per meter in wastage so for each meter the
wastage is almost 5% of 70/- I.e Rs. 3.6/-
Each Gown has 3 meter so total wastage is almost Rs. 10.8/-

Packing of each Gown costs Rs. 10/-

Hence total cost goes on to be: Rs. 292.9/-

Total Overheads are considered to be 4% percent of 292.9/-

Hence final cost after manufacturing is : Rs. 305/- per Gown

Assuming Profit margin to be 20% of 305/-

Each Gown is finally sold at Rs. 370/- to the Distributor.

Distributor has a Profit margin of almost 15% of 370/-

The Distributor Sells each gown at Rs. 430/- to the Retailer.
Retailer’s Profit margin is almost 55% of 430/-
Hence, finally each piece of Gown is sold to the consumer at Rs. 670/-

CONCLUSION:
The Cloth that costs Rs. 70/- per meter after processing and
manufacturing stages is finally sold at Rs. 670/- to the consumer.
The above procedure is how a Product is Priced in the Cloth Industry.

CASE STUDY 02

STARBUCKS

Pricing Strategy

Starbucks is an American coffee company and a coffee house chain.

Starbucks raised their beverage prices by an average of 1% across the

U.S, a move that represented the company’s first significant price
increase in 18 months.

Tall size (small) brews saw as much as a 10 cent increase. The

company’s third quarter net income rose 25% to $417.8 million from
$333.1 million a year earlier.

They raise prices of 10% of their menu items per year with a negligible
rise of only 10-30 cents.

It only takes a 1% increase in prices to raise profits by an average of

11%.
For the most part, Starbucks is a master of employing value based
pricing to maximize profits, and they use research and customer analysis
to formulate targeted price increases that capture the greatest amount
consumers are willing to pay without driving them off. Profit
maximization is the process by which a company determines the price
and product output level that generates the most profit.
REFERENCES

1. http://www.yourarticlelibrary.com/marketing/pricing/factors-affect
ing-pricing-product-internal-factors-and-external-factors/32313
2. http://www.yourarticlelibrary.com/marketing/pricing/product-prici
ng-objectives-basis-and-factors/74160
3. https://www.entrepreneur.com/encyclopedia/pricing-a-product
4. https://prezi.com/axuckdqr5d8b/starbucks-pricing-strategy/