PRICING POLICY & METHODS

 Price influences the standard of living of the

people, level of savings, market forces, level
of competition, level of profits & level of
sales.
Objectives
a) To bring flexibility in prices
b) To maximise the level of sales & profits
c) To capture market share & face competition
d) To ensure long run welfare of the firm
Factors involved in pricing policy

 Cost of production
 Demand for the product
 Level of competition
 Govt’s policy
 Economic environment
 Level of supply
 Social & ethical considerations
 Pricing Methods
 Full Cost Pricing: It is the most commonly used method. In
this method cost of a product is estimated & a margin of
profit is added on the basis of which the price is determined.
Cost plus Pricing = Cost + Fair Profit
According to Joel Dean there are 3 concepts of cost
 Actual cost: It refers to historical cost for the latest available
period. It covers wage bills, cost of raw materials &
overhead expenses at the current output rate.
 Expected cost: It means a forecast for the pricing period on
the basis of expected prices, output rates & productivity.
 Standard cost: It refers to a normal cost determination at a
certain level of output at a given level of capacity its
utilisation & its productivity.
 Product lining method
 Companies normally develop a basic platform that
can be added to meet different customer
requirements.
 Product line managers need to know the sales &
profits of each product in their product line in order
to determine price taking into consideration the
level of competition.
 The firm searches for a set of prices that maximises
profits on the total product mix.
 Price Skimming method
 Price decision for a new product is the choice
between high price & low price.
 It is known as skimming the cream policy
which a policy of relatively high prices
coupled with heavy promotional expenditure
in the early stages & then lower prices in
later stages.
 The price is high in relation to the market’s
range of expected prices.
Penetration Pricing
 A relatively low initial price is established for a new
product.
 The primary aim of this strategy is to penetrate the
mass market immediately & in doing so generate
substantial sales volume & a large market share.
 Starting with a low price is intended to discourage
other firms from introducing competing products.
 Loss Leader Pricing
 Many firms, primarily retailers, temporarily cut prices
on a few items to attract customers. This strategy is
called leader pricing, the items on which prices are
cut are termed leaders, if the price is below the
store’s cost, it is known as loss leader pricing.
 Supermarkets & department stores often drop the
price on well-known brands to stimulate additional
stores, this pays if the revenue on the additional
sales compensates for the lower margins on the
loss-leader items but this practice can dilute the
brand image.