ECM 505

EXTERNAL SEMINAR
Script

Topic- Types of Pricing

Methods

Submitted By- Sejal Kapoor

BASSC
2004625
Markup Pricing
Markup pricing is a pricing strategy where a fixed percentage is added
to the cost of a product to determine its selling price. The markup
percentage represents the profit margin the seller wants to achieve on
top of the cost. This method is commonly used in various industries to
set prices for goods and services.
Merits of Markup Pricing:
1. Markup pricing is easy to calculate and implement, making it a
straightforward method for setting prices.
2. It allows businesses to quickly adjust prices based on changes in
costs or market conditions by changing the markup percentage.
3. Cost Recovery: Markup pricing ensures that the selling price
covers both variable and fixed costs.
Demerits of Markup Pricing:

1. Markup pricing does not consider the demand for a product.

2. Markup pricing doesn't take into account the perceived value of
a product.

Formula
Markup Price = Selling Price – Average cost price
Markup Percentage = Sales Price – Unit cost/ Unit Cost * 100

Example
Let's say a company manufactures a product at a cost of $50 per unit
and decides to apply a markup of 40%. The selling price would be
calculated as follows:
Selling Price = $ 50+($50×0.40) =$50+$20=$70
Rate of Return Pricing
Rate of return pricing, also known as return on investment (ROI)
pricing, is a pricing strategy where the selling price of a product or
service is determined based on the desired rate of return on the
investment or cost incurred in producing or providing that product or
service. The rate of return is expressed as a percentage of the
investment.
Merits
1. Easy to use
2. It may be used to measure the performance of the firm.
3. It takes into consideration investment and total earnings
Demerits
1. It ignores the time value of money
2. It doesn’t use the cash inflows
3. It ignores the fact that profit can be reinvested
Formula
Rate of return price = Unit cost + (desired return*invested
capital)/unit sales
Example
A company has an objective of achieving a rate of return say 20%.
And it already invested 10 lakh and cost of each product 16 rupees
and assume sales 50000 units per year what would be the return
price?
Return Price= (16*50000) +( 20/100*10,00,000) / 50000 = 20

break even pricing

Break-even pricing is a pricing strategy that aims to set the selling
price of a product or service at a level that covers the total cost
incurred in producing or offering that product, resulting in neither
profit nor loss. The term "break-even" refers to the point at which
total revenue equals total costs, and there is no net gain or loss.
Merits
1. Break-even pricing helps businesses ensure that they cover all
their costs, reducing the risk of losses.
2. It is easy to calculate and understand.
3. Once the break-even point is achieved, every sale beyond that
contributes to profit.
Demerits
1. Break-even pricing does not consider customer demand or the
perceived value of the product, potentially leading to
underpricing or overpricing.
2. The approach assumes fixed and variable costs remain constant,
which may not hold true in dynamic business environments.
3. While it ensures cost coverage, it does not maximize
profitability as it only aims to break even.
Formula
Break even Point = Total cost / Sales – Variable cost
Example
An industry ABC produces a kind of good wherein the fixed cost
stands at 20000 and variable cost to produce good is rupees 20 . The
company sold these goods with a sale price per unit of rupees 40.
What is the break-even point?
Break even point = 20000/ (40-20) = 1000 units

Administered Price
An administered price refers to a price set by a seller, producer, or a
dominant player in the market rather than being determined by market
forces of supply and demand. Unlike prices in a perfectly competitive
market, where prices are set by the equilibrium of supply and demand,
administered prices are established and managed by a particular
entity, often with market power. The main goal of this pricing is to
reduce the impact of price competition or eliminate it.
Objectives
1. To provide basic necessities to the weaker section of the society
2. To curb or encourage the consumption of certain goods.
3. To control inflation
4. To ensure equitable distribution
Merits
1. Administered prices can contribute to price stability in the
market by preventing extreme fluctuations that might occur in a
purely competitive market.
2. Administered prices can mitigate the risks associated with
market volatility and uncertainties.
3. Administered prices are sometimes used by governments to
achieve social or economic objectives.
Demerits
1. Administered prices can distort market mechanisms by
preventing prices from reflecting actual supply and demand
dynamics.
2. Administered prices, there may be less incentive for producers
to improve efficiency or innovate since prices are not
determined by competitive forces.
3. Administered prices may not accurately reflect the true cost of
production, leading to misallocation of resources.

Examples
 1. Monopoly Pricing: A monopoly may set prices without regard
to market forces since it is the sole provider of a particular
product or service.
2. Government-Set Prices: Governments may administer prices
for essential goods and services, such as utilities, to ensure
affordability or achieve social goals.
3. Oligopoly Pricing: In an oligopoly, a small number of large
firms may collude to set prices collectively, rather than
competing against each other based on market dynamics.

Peak Load Pricing

Peak load pricing is a strategy where higher prices are charged for
goods or services during periods of high demand, often during peak
hours. The goal is to manage and balance the demand for resources,
encouraging consumers to shift their consumption to off-peak hours
and ensuring that the costs of supplying resources during peak periods
are adequately covered.
Merits
1. Peak load pricing can generate additional revenue for service
providers during times of high demand..
2. Peak load pricing helps in better allocation of resources. It
encourages consumers to shift their usage to off-peak periods
when resources are underutilized.
3. Efficient pricing during peak hours can lead to better utilization
of infrastructure and resources, reducing the need for additional
capacity investments.

Demerits
 1. Implementing and managing peak load pricing systems can be
complex, requiring sophisticated infrastructure and technology
to accurately measure and implement dynamic pricing.
2. Small businesses that cannot easily adjust their operational
hours may face challenges coping with peak load pricing,
potentially affecting their competitiveness.

Minimum Support Price

Minimum Support Price (MSP) is a price set by the government to
ensure that farmers receive a minimum remunerative price for their
produce. This support is particularly provided for certain crops to
safeguard farmers against any sharp fall in market prices. The MSP
acts as a floor price, and if the market price is below this level, the
government agencies usually step in to purchase the crop at the
minimum support price.
Objectives
1. The primary objective of MSP is to provide income security to
farmers by ensuring that they receive a minimum price for their
produce, irrespective of market fluctuations.
2. MSP aims to stabilize prices of agricultural commodities by
setting a floor price.
3. MSP contributes to ensuring a steady and reliable supply of
essential food commodities by providing incentives for farmers
to continue producing staple crops.
4. Rural Development: By supporting the income of farmers, MSP
indirectly contributes to rural development
Merits
1. MSP provides farmers with a predictable and stable income,
reducing the financial risks associated with agriculture.
2. MSP acts as an incentive for farmers to produce more, ensuring
an adequate supply of essential commodities in the market.
 3. MSP can contribute to poverty alleviation in rural areas, where
agriculture is a significant source of livelihood.
Demerits
1. Small and marginalized farmers may not always benefit
significantly from MSP.
2. MSP can lead to market distortions by creating a price floor
3. Implementing MSP policies can put pressure on government
budgets, especially when there is a need for extensive
procurement to support the minimum price.