pricing decisions(1).doc

7/25/2019 PRICING DECISIONS(1).doc

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PRICING DECISIONS

Price is one of the elements of the marketing mix. It can be defined as value expressed inmonetary terms. Value is the quantitative measure of the worth of a product to other

factors in exchange.

Setting the price

Pricing is a problem when a firm has to set a price for the first time. The following factors

may be considered before setting the pricing policy;

i) pricing objectives

a survival ob!ective

" can be pursued if the firm is faced with intense competition

" if a firm is faced with changing consumer wants" if a firm is faced with over capacity

b current profit maximi#ation

" to maximi#e current profits

c maximi#ation of current revenue" price is set to maximi#e sales

d maximum sales growth" the aim is maximi#e unit sales

e maximum market skimming

" high prices are set to skim the market $ to only sell to those who can affordf product quality leadership

" high quality and a high price is charged

ii) Estimating demand

% demand schedule is developed to show the relationship between quantity and price. iii) Estimating costs

&oth fixed and variable costs are estimated ivAnalsis o! competitor costs and prices'osts and prices are analy#ed and the firm can orient its price. (here the product is close

to that of competitors orient the price closely to that of the competitor. (here the product

is of higher quality charge a higher price. (here the product is of lower quality charge alower price.

SE"EC#ING A PRICING $E#%OD

&' mar(*p pricing

%dd a standard markup to the product cost

V%)I%&*+ ',-T /00

1.' 20000+3P+'T+4 56IT -%*+- 7000

Therefore unit costs V.' 8 1.'9 56IT -%*+-

/0082000097000 /0:

Producer aims at charging 0< mark" up on sales

$ar(*p price + *nit cost, -& desired ret*rn on sales)

/


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Variable cost /00

1.' 20000

+xpected unit sales 7000

.nit cost + /C01C,.NI# SA"ES

/0082000097000 /0:

The seller aims at charging 0< mark"up on sales

=ark"up price /0:9 $/"0

/0:09> /2.70

The price is /2.70

The firm earns a profit of /2.70" /0: :.70

#arget ret*rn pricing

This determines the price that would yield its target rate of return on investment $),I

#arget ret*rn price + *nit cost0 -desired ret*rn2 invested capital,e3pected *nit

sales)

Invested capital /000000

5nit cost /0:

4esired return 00 A0 00

:0 /70 /70

@0 0 /00 2@0 /00

Dra4 a graph to sho4 the e5*ilibri*m price'

$arginal cost and marginal reven*e

This entails equating marginal revenue to marginal cost =) ='


3/5

6rea(even price

&reak"even analysis calculates the quantity of output at which total revenue total cost.

% firm does not make any profit nor does it make lossesB the calculation is madeassuming a certain price.

5nit price %verage

variable costs$%V'

'ontribution to

overhead $fixedcosts

Total foxed

costs$overhead

&reak even

points $units

:00 200 200 700 >.2

>00 200 700 700

/000 200 C00 700

/700 200 /00 700

6rea(even point -in *nits) + total !i3ed costs,*nit contrib*tion to overhead

Contrib*tion to overhead + selling price A/C

% firm can therefore use this method to determine the price at which it will be able to

cover all the variable costs and make a reasonable contribution to the overhead.

5nit price %V' 'ont 1' &+ units>00 :00 000

/000 :00 000

/00 :00 000

/:00 :00 000

&+P T1'9 56IT ',6T)I&5TI,6 T, ,V+)D+%4

0009200

O#%ER PRICING CONSIDERA#IONS

&esides employing the methods to determine the final priceB a firm has also to consider

the followingE

i psychological pricingIt is important to consider the psychology of prices and not only their economics. Prices

can be used as indicators of quality; there are consumers who think that the higher the

price of a product the higher the quality.

2


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=any sellers believe that prices should end in odd numbers e.g.AA and not 200.

'ustomers will view AA to be within the shs 00 range and not within 200 range.

ii company pricing policies

iii impact of price on other parties" eg. competitors

iv governments policyThe government might not set prices directly but there might be general policies

regulating prices in certain industries.

F5%6TITG 4I-',56T-

4eductions made from list price offered by a seller to encourage customers to buy in

larger amounts or to make most of their purchases from that seller.

6,6 '5=5*%TIV+ F5%6TITG 4I-',56T-

+xample

6on cumulative quantity discount schedule

% manufacturer can give a scheduleE

'artons purchased on single order < discount on list price

/"/0 0.0

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