SIVAKUMAR P

PRICING POLICIES
PRICING OBJECTIVES
 To keep, increase or defend market share
 Compare prices with the competition
 Eliminate the competition
 Achieve target profits or maximise profits
 To use excess production capacity
 To project a high quality image
 To survive
All of the above give rise to setting the right
price for your company
PRICING METHODS

There are two main pricing policies:

Cost-oriented pricing: is the simplest. The
cost is calculated for each unit of production.
A percentage or mark-up is added to this
base cost to determine price.
PRICING METHODS

The most common methods of applying the

cost plus approach:
 Full cost pricing
 Direct cost pricing

 Marginal cost pricing

 Break-even pricing
FULL COST PRICING
This takes into account all the
variable costs & fixed
overheads that are directly
attributable to production, & a
pre-determined profit margin.
Weaknesses: No account is
taken of the demand side this
could result in the firm
producing products they
cannot sell
 Dr. Rosenbloom

DETERMINING THE BASE PRICE

 Cost-Plus Pricing
 Easiest, Often misleading
 A simple allocation of fixed and
variable costs
 Standard mark-up - a standard profit
margin
 Target return pricing - a standard
amount of profit per item
 Ignores demand (price sensitivity) and
fails to account for competition
DIRECT COST PRICING
Direct cost pricing is represented by a formula:
Direct cost = raw materials + direct labour +
variable factory overhead
A mark-up is added to the direct cost to cover
estimated overheads and leave a profit, so
identifying the costs directly attributed to
each specific output & using those costs to
set prices.
MARGINAL COST PRICING
Marginal costing is an accounting technique
whereby a marginal cost is determined on the
basis of additional variable costs only.
It is the amount by which the total cost is changed if
the volume of output of a product is increased by
one unit.
For example: If spare manufacturing capability is
available, export prices at marginal costs may be
quoted as the fixed costs are already being
covered by domestic sales revenue.
BREAK- EVEN PRICING
Break-even pricing allows a firm to
compare the profit outcome of
alternative sets of prices.
Firms can set prices to achieve maximum
profit by concluding the price for given
volumes.
Verifying the volume that will deliver the
most profit.
MARKET-ORIENTED PRICING
Demand-oriented pricing
Competition-oriented pricing
DEMAND-ORIENTED PRICING

This implies that a high price is charge where

customer interest is high and a low price is
charged where customer interest is low,
despite that fact that the cost may be the
same in both cases.
Based on the customer’s perceived value.
DETERMINING THE BASE PRICE
 Demand Pricing
 Based on the elasticity of demand
 Higher prices are favored with inelastic
 Price increases offset volume losses
 Lower prices are favored with elastic
 Volume increases offset price reductions
 Consumers are indifferent with unitary
demand
COMPETITION-ORIENTED PRICING
This is based on the actual or anticipated
behaviour of competitors. Exporters would
peg their price to that of their competitors.
The main forms are: going rate pricing and
sealed bid pricing.
Going rate pricing = The price is determined
by market leaders who know what price the
market will bear
Sealed bid pricing = Used when firms have to
compete for contracts on the basis of tenders.
PRICING POLICIES
 Pricing policy: general guidelines based on
pricing objectives and intended for use in
specific pricing decisions

 Psychological pricing: pricing policy based

on the belief that certain prices or price ranges
make a good or service more appealing than
others to buyers

19-14
 Odd pricing: pricing policy based on the belief
that a price ending with and odd number just below
a round number is more appealing
 Unit pricing: pricing policy in which prices are
stated in terms of a recognized unit of measurement
or a standard numerical count
 Price Flexibility: pricing policy that permits
variable prices for goods and services
 Product-line pricing: practice of marketing
different lines of merchandise at a limited number
of prices
19-15
 Promotional pricing: pricing policy
in which a lower than normal price is
used as a temporary ingredient in the
marketing strategy
 Loss leader: product offered to
consumers at less than cost to attract them
to stores in the hope that they will buy
other merchandise at regular prices
 Leader pricing
 Bundle pricing: Offering two or more
complementary products and selling them for
a single price

19-16
 Dr. Rosenbloom

DETERMINING THE BASE PRICE

Strategic Ethical Concerns Legal Concerns
Pricing
Concerns Penetration
Skimming Pricing Pricing Strategy
Strategy Maturity Decline

Growth
Introduction

 New product pricing

 Skimming Vs. Penetration
 Dr. Rosenbloom

DETERMINING THE BASE PRICE

Legal Concerns Ethical Concerns Strategic
Pricing
Penetration Concerns
Pricing Strategy
Skimming
Decline
Pricing Strategy Maturity

Growth
Introduction

 High initial price for quick ROI

 Inelastic demand
 Price insensitivity by the market
 Dr. Rosenbloom

DETERMINING THE BASE PRICE

Legal Concerns Ethical Concerns Strategic
Pricing
Skimming Pricing Concerns

Strategy
Penetration
Maturity Decline
Pricing Strategy

Growth
Introduction

 Low initial price with elastic demand

 Volume for lower production costs
 Imminent competition
 Dr. Rosenbloom

DETERMINING THE BASE PRICE

Strategic Pricing
Ethical Concerns
Concerns Legal Concerns

 Predatory Pricing
 Aggressive pricing to drive out newer,
smaller rivals
 After removal of rival, prices are
raised again
 Dr. Rosenbloom

PRICING POLICIES

Prestige
Pricing

Loss-Leader Odd-Even
Pricing Pricing

Product Line
Pricing

 Pricing at relatively high levels so as to

convey an image of high quality or
exclusivity
 Dr. Rosenbloom

PRICING POLICIES

Prestige
Pricing

Loss-Leader Odd-Even
Pricing Pricing

Product Line
Pricing

 Pricing policy which offers products at

prices below or near cost to attract
consumers from competitors’ stores
 Dr. Rosenbloom

PRICING POLICIES

Prestige
Pricing

Loss-Leader Odd-Even
Pricing Pricing

Product Line
Pricing

 Price lining is producing or marketing multiple

products at different price points
 Bundling is marketing two or more products in a
single package for a special price
 Dr. Rosenbloom

PRICING POLICIES

Prestige
Pricing

Loss-Leader Odd-Even
Pricing Pricing

Product Line
Pricing

 Odd pricing refers to a price ending with an

odd number just under a round number
 Even pricing is used to convey high quality