PRODUCT PRICING

Pricing Policy
Objectives of Pricing Policy
Factors Involved In pricing
Pricing methods
Pricing Policy

Systematic approach required for pricing

Decision making with respect to pricing is
very important
Setting price is a complex phenomena
No cut-and-dried formula for fixing prices
Depends upon various situations in
business
Pricing policy should be tailored to
various competitive situations
Objectives Of Pricing Policy
1. Prices should aim at maximising profit
for the entire product line, i.e they
should stimulate profitable combination
sales.
2. Prices should be set to promote the long-
range welfare of the firm, e.g., to
discourage competitors from entering
the field.
Objectives Of Pricing Policy
3. Prices should be adapted and
individualized to fit the diverse
competitive situations encountered by
different products,
4. Pricing policies should be flexible enough
to meet changes in economic conditions
of the various customer industries
Objectives Of Pricing Policy
5. A predetermined and
systematic method of pricing
new products should be
provided.
Factors involved in pricing method
1. It
depends on objectives of the
business
Pricing decisions depends upon the
objectives of the business; whether it
is maximization of profit or
promotion of long-term welfare of the
firm.
Factors involved in pricing method
2. It depends on the cost of production of the
product:
Cost of producing the commodity plays a vital
and dominant role in taking decisions on pricing
the commodity.
Cost may include purchase of raw materials,
wages, packing materials, advertisement
expenses, establishment charges and taxes levied
by Central and State Government.
Factors involved in pricing method
The important point here is cost
considerations are essential factor
for pricing; but it is not the only
factor in setting prices.
Factors involved in pricing method
3. It depends on demand factor of the
product:
The price policy of firm also depends on
elasticity of demand of the product.
If the demand is inelastic, the policy of
price increase and fixing price at a high
level would prove profitable.
Factors involved in pricing method
If the demand is elastic, a policy
of reducing price and keeping the
price at the lower side would
prove profitable for the firm
Factors involved in pricing method
4. Consumer psychology and
pricing
a) The consumer depends upon the
quantitative measure.
Quantitative measure means
quality, price image, customer
service etc.
Factors involved in pricing method
b)Price constitutes a barrier to demand
when its is too high, and also when it is too
low.
When the price is too high, the consumer
considers that it is too expensive for him
to have it, or he may consider that the
utility derived from the product is low.
Consequently, the consumer may not
demand the product.
Factors involved in pricing method
If the price it too low, the
consumer may suspect the quality
of the product and may not
demand it. Lowering prices too
much has got its own risks.
Factors involved in pricing method
c) Price is considered as an
indication of the quality and
high priced material is a
symbol of extra quality
Factors involved in pricing method
d)Average consumers become quality-
conscious, if there is an improvement
in the income of the people. The
demand for quality products will
increase.
e) Consumer always associate these
firms with the superior quality
product
Factors involved in pricing method
f) Bargain pricing, price
reduction, gift articles with
sales, etc., would attract more
of women customers
Pricing Methods

1. Cost-Plus or full-Cost Pricing Method

2. Target Pricing Or Pricing For A Rate
Of Return
3. Marginal Cost Pricing
4. Going-Rate Pricing
5. Customary Pricing
6. Differential Pricing
7. Administered Pricing
1.Cost-Plus or full-Cost Pricing Method
Under this method, the price is set to
cover all costs and a predetermined
percentage of profit

This means the selling price of the

product is computed by adding a certain
percentage to the average total cost of the
product
1.Cost-Plus or full-Cost Pricing
Method
Advantages
1. It helps in setting fair prices
2. It is easy for application by all types of firms
whether single-product or multi-product firms.
3. This method safeguards the interest of the firm
against risks when the demand is uncertain
1.Cost-Plus or full-Cost Pricing
Method
Disadvantages
1. This method totally ignores the influence of
demand.
2. It fails to reflect the forces of competition
adequately
3. It ignores marginal or incremental cost and
uses average cost instead.
 2.Target Pricing Or Pricing For a Rate
Of Return
According to this method, the manufacturer
considers a pre-determined target rate of return
on capital invested.
Davies & Hughes formula to calculate the desired
rate of return

capital employed
Percentage mark - up on cost   Planned rate of return
total annual cost
3.Marginal cost Pricing
Under marginal cost pricing, the prices of
a product is determined on the basis of the
marginal or variable costs.
In this method the fixed costs are totally
ignored and only variable costs are taken
into account.
This is done on assumption that fixed
costs are caused by outlays which are
historical and sunk.
3.Marginal cost Pricing
Advantages
1. When public utility concerns adopt marginal
cost pricing, it helps in maximising social
welfare
2. This method enables the firms to face
competition.
3. This method helps in optimum allocation of
resources.
3.Marginal cost Pricing
1. Firms may find it difficult to cover up costs and
earn a fair return on capital employed.
2. When production takes place under decreasing
costs, marginal cost pricing is unsuitable.
3. Marginal cost pricing requires a better
understanding of marginal cost technique.
4.Going-Rate Pricing
This method of pricing conforms with the
system of pricing in Oligopoly where a firm
initiates price changes and the other firms in the
industry merely follow the pattern set by the
leader.
Other firms accept the leadership.
This going-Rate pricing method is also called
Acceptance – Pricing.
4.Going-Rate Pricing
Advantages
1. It helps in avoiding cut-throat competitions
among the firms.
2. It is a rational pricing method when costs are
difficult to measure.
3. Going rate pricing is less troublesome and less
costly since exact calculation of costs and
demand is not necessary
5.Customary Pricing
Prices of certain goods become more or less
fixed for a considerable period of time, not by
deliberate action on the sellers part, but as a
result of their having prevailed for a
considerable period of time
Only when the costs change significantly, the
customary prices of these goods are changed.
While changing the customary price, it is
necessary to study the pricing policies and
practices adopted by the competing firms.
6.Differential Pricing
 An important aspect of price differential is price
discrimination.
 Producer will have various goals in adopting
differential prices, they are:
1. Implementation of Market strategy
2. Profitable market segmentation
3. Market expansion
4. Competitive adaptation
5. Reduction of production cost
7.Administered Prices
Administered prices are the prices fixed by the
government to prevent unnecessary price
escalations, black marketing and shortages in
supply.
Administered price is a pool price and the
individual producing units are given retention
prices.
Government may resort to administered prices
for essential raw materials like steel, cement,
fertilizers, etc., which are very essential for
industrial and agricultural development.