pricing techniques for profit maximization

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BY SKILLS DEVELOPERS

Pricing Techniques for Profit Maximization

Skills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org

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What is Price

The amount of money charged for a product and services is called Price


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Objective of Pricing

Profit Maximization

High Market Share by attracting and retaining customers

To attain Status Quo by Stable Price

Meeting Competition in Market

High Return on InvestmentSkills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org

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Fact0rs you will consider before Pricing

How should I price my product?Market Size.Customer Price Sensitivity.Estimated sales at different price levels.How much market share will effect if change appear?Product Costs.Current and potential competitive reactions.Nonprice factors, such as features and performance.

(Quality, uniqueness, availability, convenience, service, and warranty)


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Marketing Management

Marketing management is about placing the

right product, at the right price, at the right

place, at the right time.


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Price Determination Methods

Cost Base Pricing

Break Even Concept

Demand Base Pricing

Pricing as per Competition


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What is Cost

What you pay in monetary terms to get or achieve a objective is called its Cost.

Material Cost.Labour Cost.FOH Cost.Selling CostAdministrative Cost.Financial Cost.


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KINDS OF COSTS

Variable Cost

Fixed Cost

Semi Variable Cost


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Variable Cost

A cost that increases in total proportionately with an increase in activity and decreases

proportionately with the decrease in activity.(Variable Cost remain fixed per unit)

For Example:-Direct Material Cost. Packing Cost.Direct Labour Cost (Piece Rate).Indirect Material Cost.Normal Spoilage


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Fixed Cost

A Cost that does not change in total as business activity increases or decreases.

(Fixed Cost remain fixed in Total)

For Example :-Rent CostFixed WagesDepreciation


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Semi Variable Cost

A Cost that displays both fixed and variable characteristics.

For Example :-Electricity, Gas, Fuel, Oil etc.Maintenance CostTravelling and Entertainment Cost.Some Supplies.


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Cost based Pricing

Mark up Pricing (Cost Plus Pricing)

Price = Cost + Mark up

Preferable for Marketing and Trading Firms.

Slower turnaround, Larger Markup and vice-versa


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Cost Based Pricing

Full Cost Pricing (Absorption Cost Pricing)

Manufacturing Variable Cost Per Unit -----------+ Selling Variable Cost Per Unit -----------+ Administrative Variable Cost Per Unit -----------+ Manufacturing Fixed Cost Per Unit -----------+ Selling Fixed Cost Per Unit -----------+ Administrative Fixed Cost Per Unit -----------+ Profit Margin Per Unit -----------= PRICE


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Cost Based Pricing

Full Cost Pricing (Absorption Cost Pricing)

Estimated Fixed Unit Cost of the Product will be Based on Normal Level of Production and Sales


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Cost Based Pricing

Marginal Cost Pricing

All Variable Cost Per Unit ------------

+Some Portion of Fixed Cost Per Unit ------------

OR+ Zero Portion of Fixed Cost Per Unit

------------

= PRICESkills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org

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Cost Based Pricing

Marginal Cost Pricing

Marginal cost pricing targets at maximizing the contribution towards fixed costs.

It takes into account the cost and demand aspects.

Under competitive market conditions, marginal cost pricing is more useful.

A firm has a number of products/product lines, marginal cost pricing is useful.


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Contribution Margin

Sales - Variable Cost = Contribution Margin

100 - 65 = 35


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Break Even Point

A point of sales where company earns zero profit.

Sales - Variable Cost = CM – Fixed Cost = zero

100 - 65 = 35 – 35 = 0


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Break Even Sales (Amount)

Assume your Fixed Cost is Rs. 5,00,000 Your Variable Cost is 65% of your Sales. Now your Contribution Margin is 35%

Break Even Sales = Fixed Cost / CM * 100

5,00,000 / 35 * 100 = 14,28,571

Break Even Sales = 14,28,571


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Break Even Sales (Units)

Assume your Fixed Cost is Rs. 5,00,000 Sale Price is Rs 100 per unit Your Variable Cost is Rs 65 per unit Now your Contribution Margin is 35 per unit

Break Even Sales = Fixed Cost / CM per unit * 100

5,00,000 / 35 = 14,286 units

Break Even Units = 14,286


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Sales for 25% Profit

Sales for 25% Profit = Fixed Cost / (CM- Profit Ratio) * 100

5,00,000 / (35-25) * 100 = 50,00,000

Sales for 25% Profit = 50,00,000


BREAK EVEN CALCULATION TABLE

Item Sold Price Total Sales

Variable Cost Per

Unit

Total Variable

CostContribution

MarginFixed Cost Total Cost Profit Profit %

300 500 150,000 300 90,000 60,000 100,000 190,000 (40,000) (26.67)

500 500 250,000 300 150,000 100,000 100,000 250,000 -

-

700 500 350,000 300 210,000 140,000 100,000 310,000 40,000 11.43

900 500 450,000 300 270,000 180,000 100,000 370,000 80,000 17.78

1,100 500 550,000 300 330,000 220,000 100,000 430,000 120,000 21.82


BREAK EVEN CALCULATION TABLE FOR ROI


Variable Cost Per

Unit

Total Variable

CostContribution

MarginFixed Cost Total Cost Profit Profit % Investment ROI

300 500 150,000 300 90,000

60,000 100,000 190,000

(40,000)

(26.67) 10,000,000 (4.80)

500 500 250,000 300 150,000

100,000 100,000 250,000

- - 10,000,000 -

700 500 350,000 300 210,000

140,000 100,000 310,000 40,000 11.43 10,000,000 4.80

900 500 450,000 300 270,000

180,000 100,000 370,000 80,000 17.78 10,000,000 9.60

1,100 500 550,000 300 330,000

220,000 100,000 430,000 120,000 21.82 10,000,000 14.40

1,409 500 704,500 300 422,700

281,800 100,000 522,700 181,800 25.81 10,000,000 21.82


BREAK EVEN CALCULATION TABLE FOR PRICE AND DEMAND ANALYSIS (PROFIT BALACNE)

Item Sold Price Total

Sales

Variable Cost

Per Unit

Total Variable

CostContributio

n Margin CM % Fixed Cost Total Cost Profit Profit % Investment ROI

1,100

500

550,000

300

330,000

220,000 40.00

100,000

430,000

120,000

21.82

10,000,000

14.40

1,401

475

665,475

300

420,300

245,175 36.84

100,000

520,300

145,175

21.82

10,000,000

17.42

1,930

450

868,500

300

579,000

289,500 33.33

100,000

679,000

189,500

21.82

10,000,000

22.74

3,100

425

1,317,500

300

930,000

387,500 29.41

100,000

1,030,000

287,500

21.82

10,000,000

34.50


BREAK EVEN CALCULATION TABLE FOR PRICE AND DEMAND ANALYSIS (ROI BALACNE)


Variable Cost Per

Unit

Total Variable

CostContribution

Margin CM % Fixed Cost Total Cost Profit Profit % Investment ROI

1,100 500

550,000

300 330,000

220,000 40.00

100,000

430,000 120,000

21.82

10,000,000 14.40

1,257 475

597,075

300 377,100

219,975 36.84

100,000

477,100 119,975

20.09

10,000,000 14.40

1,467 450

659,925

300 439,950

219,975 33.33

100,000

539,950 119,975

18.18

10,000,000 14.40

1,760 425

748,000

300 528,000

220,000 29.41

100,000

628,000 120,000

16.04

10,000,000 14.40


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Method of Distributing Fixed Cost Among Different Items

It can be distributed at the basis of Material cost.

It can be distributed at the basis of Labour hours.

It can be distributed at the basis of Labour Cost.

It can be distributed at the basis of ABC Techniques.

(Activity Based Costing)Skills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org

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Demand Based Pricing

Skimming Pricing This strategy refers to a firm’s desire to skim the market by

selling at a premium price.

This method literally skims the market in the first instance through high price and then settles down for a lower price.

This means that at high price high profits in the introduction stage of the product.

This method is especially useful in the pricing of new products of luxury.

It also help in assessing the demand.Skills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org

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Penetration Pricing It is opposed to the skimming strategy. Its objective is to attain market share in

high competitive market If product in not luxury and can capture a

large volume of sale, the firm can choose this method.

This strategy often heralds price war in the industry.


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Charging What the Traffic Will Bear As there are two principles in pricing.Cost of service principle and Value of service

principle. The second term is charging what the traffic

can bear. Professionals like doctors, lawyers, chartered accountants etc., adopt this principle.

A monopolist can afford to adopt this principle to maximize his profits.


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Discount PricingTrade Discount

It is kind of functional discount. It is given to the buyers buying for resale or for sub dealers.

Cash DiscountIt is a concession given to encourage to pay in full within a short period of the date of the bill or invoice. Generally the period to avail the cash discount is usually 10 days

Quantity DiscountTo encourage bulk or large purchases at a time, quantity discount is offered.

Seasonal DiscountDuring the slack season this discount is offered.


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Method of Adding Discount % in Price

If your sum of discounts is 15 %

Net Sale Price is 500

Than Gross Sale Price will be calculated as

500/(100-15)*100Or 500/85*100 = 588.24


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Premium Pricing If a firm has heterogeneity of demand for substitute

products with joint economies of scale. For example a colour television set.

This Pricing is used to capture High Income group customers.

Products will be displayed in Premium Stores.


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Going Rate Pricing It is commonly used in oligopolistic market.

This method assumes that there will be no price war within the industry.

new firms may follow a wrong pricing strategy.


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Pricing Strategies Mix


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Other Pricing Techniques

Psychological Pricing.Product Line Pricing or Package Pricing.Optional Product Pricing.

(Unique Product in a Range will be charged Extra)Captive Product Pricing

(Where products have complements, one will be charged high and other low)

Geographical Pricing.Value Pricing.

( value meals at McDonalds and other fast-food restaurants)


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Some Other Factors

Competitor AnalysisUpdate your Competitor Analysis Report at Weekly Basis

BrandingService techniques and consistency in policies will high your image which ultimately pays you


pricing techniques for profit maximization

Business

pricing cost

cost administrative

variable cost fixed

entertainment cost

foh cost

financial cost

packing cost

fixed unit cost