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UNIT-III
Cost Analysis,
Market Structures and Pricing
MANAGERIAL ECONOMICS AND FINANCIAL ANALYSIS
 What’s Pricing?
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 Pricing is the function of determining product value in monetary

terms by the marketing management of a company before it is
offered to the target consumer for sale.

 “Cost-based” is product driven; a summation of costs (Soaps,

Daily Bread)

 “Value-based” is customer perception driven (Mobile Phones,

Apparel)
 Pricing
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 Pricing is one of the most important elements of the marketing mix

 Price is the marketing variable that can be changed most quickly.

 The price of a product may be seen as a financial expression of the value of

that product.

 “Price is amount of money charged for a product or service. It is the sum of all
the values that consumers give up in order to gain the benefits of having or
using a product or service”.

 Total Revenue = Price * Quantity

 Profits = Total Revenue - Total Cost

 Factors to consider before setting price
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• Know how much it costs to make and deliver product
or service Direct and Indirect costs. Fixed and Variable
costs.

• Know your BEP

• Research current prices in the market.

• Consider your market positioning and

competitive advantage as this is likely to impact
directly on your choice of pricing strategy.
 Importance of Price
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 Choosing the right pricing strategy strengthens the chance of

achieving turnover and profit in line with company objectives.

 Getting it wrong can be painful!

 Price creates a first impression of the quality of the product/service

and other value-based judgements come later.

 Pricing low can signify cheap and high can indicate quality
 Pricing Objectives
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 To maximise profits

 To increase sales

 To increase the market share

 To satisfy customers

 To meet the competition

Factors Affecting Pricing
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Pricing Approaches
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 Pricing approaches - Cost-Based Pricing
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 Cost-Based pricing involves setting prices based on the costs

of producing, distributing, and selling the product plus a fair rate
of return for its effort and risk.

 A company’s costs may be an important element in its

pricing strategy.
 Pricing approaches - Value-Based Pricing
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 Rather than cutting prices to match competitors, they attach value-added features and
services to differentiate their offers and thus support their higher prices.

 It is a pricing strategy which sets prices primarily, but not exclusively, according to
the perceived or estimated value of a product or service to the customer rather than
according to the cost of the product or historical prices.

 when products are sold based on emotions (fashion),

 In shortages Ex- drinks at open air festival and hot summer day or

 for complementary products Ex- printer cartridges, headsets for cell phones
 Value-Based Pricing
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 Value-based pricing in its literal sense implies basing pricing on the product benefits
perceived by the customer instead of on the exact cost of developing the product.

 Ex- a painting may be priced as much more than the price of canvas and paints

 The price in fact depends a lot on who the painter is.

 Painting prices also reflect factors such as age, cultural significance and most importantly,
how much benefit the buyer is deriving

 Owning an original Dali or Picasso painting elevates the self-esteem of the buyer and
hence elevates the perceived benefits of ownership
 Price: Role and Function
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 Signal to the Buyer

 Instrument of Competition

 Improving Financial Performance

 Marketing Program Considerations

Price: Role and Function - Signal To The Buyer
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• Direct way of Communication

• Basis of Comparison between brands

• Positioning the brand

Low Price product- positioned as affordable High Price Positioned as a Luxury Car
Price: Role and Function - Instrument of Competition
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• Quickly attack Competitors
• Position your business away from Direct Competition
Price: Role and Function - Improving Financial Performance
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• Impact on Business Financial Statements

• Ex: Maggi

• Maggie had to face litigation . It resulted company,

net loss in 2 quarters. Company launched the
product with an increase of INR 2
 Price: Role and Function - Marketing Program Considerations
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 Substitution for advertising and sales promotion

 Incentive to channel members

Wholesaler Retailer Customer

Company ( INR 15) (INR 18) (INR 20)
 Pricing Process
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❖ Selecting the price objective

❖ Determining demand

❖ Estimating costs

❖ Analysing Competitors' Costs, Prices, and Offers

❖ Selecting a pricing method

❖ Selecting the Final Price

 PRICING METHODS
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 Cost Based Pricing

 Competition Based Pricing

 Pricing Based on Economic Considerations

 Other Pricing Methods/ Strategies

 PRICING METHODS
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❖ Cost Based Pricing

❖Full Cost Pricing

❖Marginal Cost Pricing

❖Target Pricing

❖Programme Pricing

❖ Competition Based Pricing

❖Going Rate Pricing

❖Loss Leadership

❖Trade Association

❖Customary Pricing

❖Price Leadership

❖Cyclical Pricing

❖Imitative Pricing and Suggested Pricing

❖Turnover Pricing
 PRICING METHODS
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❖ Pricing Based on Economic Considerations

❖Administered Pricing

❖Dual Pricing

❖Price Discrimination/ Differential Pricing

❖ Other Pricing Methods/ Strategies

❖Sealed Bid Pricing

❖Limit Pricing

❖Market Skimming Pricing

❖Penetration Pricing Method

❖Two Part Pricing Method

❖Block Pricing
 PRICING METHODS
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❖ Other Pricing Methods/ Strategies

❖Bundling Pricing

❖Peak Load Pricing

❖Cross Subsidization

❖Transfer Pricing

❖Premium Pricing

❖Perceived Value Pricing

❖Value Pricing

❖Rigid Pricing

❖Flexible Pricing

❖Multi Product Pricing

 PRICING METHODS
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❖ Other Pricing Methods/ Strategies

❖Ramsay Pricing

❖Surge Pricing

❖Every Day Low Pricing

❖High Low Pricing

❖Export Pricing

❖International Price Discrimination and Dumping

 Cost Based Pricing Method
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❖ Full Cost Pricing Method

❖ Total production costs + Selling and administration costs + Markup

Number of units expected to sell

❖ It includes Direct Material cost, Direct Labour Cost, Selling and Administrative Cost and overhead

costs for a product

❖ Marginal Cost Pricing Method

❖ represents the incremental costs incurred when producing additional units of a good or service.

❖ (Change in Costs)

(Change in Quantity)
 Cost Based Pricing Method
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❖ Target Based Pricing Method

❖ Is a method wherein the firm determines the price on the basis of a target rate of return on the
investment

❖Unit Cost + (Desired Return x Invested Capital)

Unit Sales

❖ Programme Based Pricing Method

❖The supply price of the commodity is considered

❖Cost of Production + Mark up

❖ In order to cover own cost and profit margin, a mark-up is put over the supply price.

❖The supply price may be the whole sale price or that the goods at the go down etc.

❖This pricing policy is quite popular in wholesale and retail trade

 Competition Based Pricing Method
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❖ Going Rate Pricing Method

❖ Is adapted when a business sets the price of their product or service based on the market price.

❖ This pricing strategy is often used to price similar products, like commodities or generic items, that have little variation in
design and function.

❖ Is most often used to price products or services that are homogenous and don't vary in design.

❖ Businesses that choose a going rate pricing strategy often set their prices based on the leader of the market.

❖ Businesses that excel with this pricing strategy benefit from a strong branding and marketing strategy.

❖ Loss Leadership

❖“A Loss Leader is an item which produce a less than customary contribution or a negative contribution to overhead, but
which is expected to create profits on increased future sales or sales of other items“

❖By making initial losses, will first introduce the customers to his product or services

❖Businesses when they enter a market they adopt to this strategy.

❖Thereby they build up a customer base to help the business secure a source of recurring revenue for the future.

❖Requires a planned execution.

 Competition Based Pricing Method
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❖ Trade Association Pricing Method

❖ To avoid uncertainties of pricing decision and the downward pressure on prices which competition exerts, firms frequently
come to the express or implied agreements to maintain prices at a similar level.

❖ Customary Pricing

❖A retailer sets prices for goods and services and seeks to maintain those prices over an extended period of time.

❖In case of some commodities prices get fixed because they have prevailed over a long period of time.

❖Any change in costs reflects quality and Quantity.

❖Movies and vending-machine products

❖ Price Leadership

❖Is a situation in which one company, usually the dominant one in its industry, sets prices which are closely followed by its
competitors.

❖This firm is usually the one having the lowest production costs, and so is in a position to undercut the prices charged by
any competitor who attempts to set its prices lower than the price point of the price leader.

❖Competitors could charge higher prices than the price leader, but this would likely result in reduced market share, unless
competitors could sufficiently differentiate their products.
 Competition Based Pricing Method
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❖ Cyclical Pricing

❖ refers to the pricing decisions of the firm which are taken to suit the fluctuations in the business

conditions.

❖ Pricing will be depending on assessment of general economic environment i.e. boom or

depression.

❖ During the period of depression prices of manufactured articles, share and stock

fall more steeply, while during boom period, prices of all commodities rise very significantly.

❖ Imitative Pricing and Suggested Pricing

❖ Is the price that a product's manufacturer recommends it be sold for at point of sale.

❖Is also referred to as the list price by some retailers.

❖ Turnover Pricing
 Pricing Based on Economic Considerations
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❖ Administered Pricing

❖ An administered price is the price of a good or service as dictated by a government or centralized

authority, as opposed to market forces of supply and demand.

❖ Dual Pricing

❖Is the practice of setting different prices in different markets for the same product or service.

❖This tactic may be used by a business for a variety of reasons, but it is most often an aggressive
move to take market share away from competitors.
 Pricing Based on Economic Considerations
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❖ Price Discrimination/ Differential Pricing

❖ means charging different prices from different customers or for different units of the same product.

❖ Bases of Differential Pricing

❖ Income of the customer

❖ Nature of the product

❖ Age, sex and status of the customers.

❖ Time of service

❖ Geographical

❖ Use of the product

 Other Pricing Methods and Strategies
❖ Sealed Bid Pricing 31
❖ Is also called as Tender pricing

❖ Price is selected on the basis of sealed bids (quotation or estimated price) for the jobs.

❖ Is used in construction business or Contract Business

❖ Limit Pricing

❖ refers to the strategy to restrict the entry of new supplier into the market by reducing the price of the product and
increasing the level of output of product and creating such a situation which becomes unprofitable or very
illogical for the new supplier to enter into the market and grab the existing market customer base.

❖ Market Skimming Pricing

❖ A firm charges a high initial price and then gradually lowers the price to attract more price-sensitive customers.

❖ The pricing strategy is usually used by a first mover who faces little to no competition.

❖ Firm to quickly recover its sunk costs before increased competition and pricing pressure arise.
 Other Pricing Methods and Strategies
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❖ Market Penetration Pricing

❖ is a pricing strategy that is used to quickly gain market share by setting an initially low price to entice customers to purchase.

❖ Is generally used by new entrants into a market.

❖ An extreme form of penetration pricing is called predatory pricing.

❖ Two Part Pricing Method

❖ Is a form of pricing in which consumers are charged both an entry fee (fixed price) and a usage fee (per-unit price)
❖ Phone contract, Amusement parks
❖ Block Pricing

❖ Is a strategy in which identical products are packed together in order to enhance the profits by forcing customers to make an “all
or none decision of purchase”.

❖ The purpose is to extract the maximum Consumer Surplus.

❖ Soaps, ACT Popcorn

 Other Pricing Methods and Strategies
❖ Bundling Pricing 33
❖ when multiple products or services are grouped together in a single package and sold for a lower price than if the customer were
to buy each item individually.

❖ Usually the price of the expensive product is reduced without taking away the value of the product.

❖ Combo Meals, TV with Cable / Internet Connection

❖ Peak Load Pricing

❖ The consumer who purchases the commodity during the high demand period has to pay more as compared to the one who buys
during low demand periods.

❖ Firm discriminates prices on the basis of high usage, high-traffic, high demand times and low demand times.

❖ Cross Subsidization

❖ When a marketer charges higher prices to a group of consumers in order to subsidize lower prices for another group

❖ Healthcare, Electricity

❖ Transfer Pricing

❖ Is the price that is paid for goods or services transferred from one unit of an organization to its other units situated in different
countries.
 Other Pricing Methods and Strategies
❖ Premium Pricing 34
❖ creates an approving perception among buyers because buyers believe that the higher the price of goods better will be its
quality.

❖ This strategy is used by companies to charge higher prices as compared to the price of their competitors’ products

❖ Designer Clothes, Apple

❖ Perceived Value Pricing

❖ Firm sets the price of a product by considering what product image a customer carries in his mind and how much he is willing to
pay for it.

❖ Diamonds, Starbucks

❖ Value Pricing

❖ Rigid Pricing

❖ Prices tend to be the most rigid in resource markets, especially labor markets,

❖ Flexible Pricing

❖ Product’s final price is open for negotiation

 Other Pricing Methods and Strategies
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❖ Multi Product Pricing

❖ All the firms have more than one product in their line of production.

❖ Even the most specialized firms produce a commodity in multiple models, styles and size, each so much

differentiated from the other that each model or size of the product may be considered a different

❖ The pricing under this condition is known as multi-product pricing or product line pricing .

❖ In multi-product pricing, each product has a separate demand curve. But, since all of them are produced under

one organization by interchangeable production facilities, they have only one inseparable marginal cost

❖ Ramsey Pricing

❖ Frank Ramsey argued that the most efficient way for a regulated monopoly (such as a public utility) to obtain a
particular rate of return would be to charge each class of consumers a price that was inversely proportional to
the price elasticity of that class.
 Other Pricing Methods and Strategies
❖ Surge Pricing
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❖ a way of setting the price for a product or service in which the price changes according to how much demand there is for it at a particular point of
time.

❖ Every Day Low Pricing

❖ Retail Marketers to offer products at lower prices on regular basis without offering any discounts, sales offers or comparison shopping. Under this pricing
strategy initially retailers set low price and keep these prices over longer period of time. Walmart, Amazon

❖ High Low Pricing

❖ it is a pricing strategy where a firm initially charges a high price for a product and then subsequently decreases the price through promotions,
markdowns, or clearance sales.

❖ With this strategy, a product’s price alternates between “high” and “low” over a given time period.

❖ A firm relies on sale promotions to encourage consumer purchases.

❖ Export Pricing

❖ Price fixed for the export products or services which the exporter intends to sell in the overseas market

❖ International Price Discrimination and Dumping

❖ is an international price discrimination in which an exporter firm sells a portion of its output in a foreign market at a very low price and the remaining

output at a high price in the home market