Download - Costing and Pricing of Products Dr. A. Sharada Devi Dean of Home Science ANGRAU, Hyderabad
Costing and Pricing of Products
Dr. A. Sharada DeviDean of Home ScienceANGRAU, Hyderabad
Costs + Margins = PRICE
“ A price is not merely a function of costs and margins… ”
“…it is an expression of VALUE ”
Definition of the terms
• Cost is the total amount invested by the manufacturer in the product
• Costing is the process of determining the costs of producing and marketing each product in the product line
• Price is the amount that is asked or received in exchange for a product
• Pricing is the process of determining the selling price of goods that are manufactured
Relationship of Cost, Price and Profit
• Manufacturer’s Price = Manufacturing costs + Operating expenses + Profit
• Manufacturer’s Price = Retailer’s Cost
• Retailer’s Price = Retailer’s Cost + Operating expenses + Profit
Pricing Puzzle
4 C’s• CUSTOMER VALUE• COST• CONVENIENCE• COMMUNICATION
4 P’s• PRODUCT• PRICE• PLACE• PROMOTION
Pricing Puzzle
• Production costs• Indirect costs• Advertising costs• Distribution costs• Manufacturer’s
margin• Distributor’s margin• Seller’s margin
Product performance• Usefulness & Quality
Image / Aspirations• Brand Equity
Availability• Distribution Strategy
Service• Before/During & After
sales
Minimize Optimize Maximize
Costs + Margins = PRICE
VALUE
• Physical Differences– Features, performance, durability, conformance,
design, etc…• Availability Differences
– Distribution channels ; Stores, mail-order, internet, etc…
• Service Differences– Delivery, installation, training, consulting,
maintenance, etc…• Price Differences
– Price positioning (Very high / High / Medium / Low / Very Low)
• Image Differences– Symbols, atmosphere, events, media, etc…
The key to drive value is to offer relevant and distinctive product differentiation
• Physical Differences– Levi’s Engineered Jeans (Ergonomic construction,
durability, style)• Availability Differences
– Dell Computer’s customized production, Volkswagen “e.lupo”
• Service Differences– Star Hospitals – Cardiology, critical care
• Image Differences– Audi vs Mercedes, DuPont (Innovation Leader)
Differentiation : Examples
Manufacturing costs• Raw materials• Direct Labour• Factory overheads
Factory overhead• Indirect labour• Factory occupancy costs• Other overheads
Costing helps to determine• The productability of a style with in an established price
range• The profit potential in a style• Whether a style should be added to the line
Income Statement
Net sales = Rs 1,05,00,000 100%Cost of goods sold = Rs 63,00,000 60%Raw material costsDirect labourFactory overhead
Gross Profit margin = Rs 42,00,000 40%Gen operating expenses= Rs 31,00,000 30%Net profit or loss(+ or -) = Rs 10,50,000
10%
Methods of CostingMethods of Costing:
Absorption Costing – Considers all manufacturing costs both variable and non-variable to be product costs that must be allocated to products. Overhead is computed as a percentage of direct labour
Direct Costing – considers only variable costs such as production labour, material costs and sales commission as product costs
Stages of Costing Preliminary Costing – done during product devt before samples are made Cost estimating – final costing prior to production
Materials costingLabour costing
Recosting – done when there is a change in production Actual Costing – determined during production
Stages in the Product Lifecycle
50 100 150 200 250 300
50
100
150
200
250
300Desired Profit
Forecast Profit
Profit
Break-even volume
Income-sales li
ne
LossCost l
ine
Fixed Costs
Inco
me
and
Cost
sCost –Volume – Profit Relationships Break-
even Analysis
0
Volume of sales & Production
Break even volume = Non-variable costsContribution Margin
Break-even Analysis
• What is the break-even volume at the established unit price?
• What is the break-even volume if the price is increased or decreased?
• What is the break-even volume for the alternative methods of producing a product?
• What is the break-even volume for the same product made ‘in house’ or by a contractor?
Pricing Decisions
• INTERNAL FACTORS– Marketing
Objectives• Positioning• Target Group
– Marketing Mix Strategy
• 4 P’s– Costs
• Fixed & Variable– Management
Approach• Responsibility• Perspective
• EXTERNAL FACTORS– Market
• Pure Competition• Monopolistic
Competition– Demand
• Elastic / Inelastic– Competition
• Competitors’ offers• Competitiors’ reactions
– Economy• Buying power
– Government Influence• Laws & Regulations
Effective Pricing Strategy An effective pricing strategy will help to• Meet the profit objectives • Meet or beat the competitors’ prices • Retain or increase the market share • Match the image or reputation of the
business, product or service • Match the offer to market demand
Pricing Strategies
The basic issues considered for developing a pricing strategy are:
• At what profit level will the list prices be set?• Will the prices be cost based or demand based?• Will the firm use price lining and or odd pricing?• What terms will be negotiable as a part of sales
agreement?• Will the firm’s pricing strategy fall within legal
restrictions on pricing?
New-Product Pricing Strategies
Market-skimming pricingMarket-penetration pricing
Market-skimming pricing
Market-skimming pricing is a strategy with high initial prices to “skim” revenue layers from the market
• Product quality and image must support the price• Buyers must want the product at the price• Costs of producing the product in small volume
should not cancel the advantage of higher prices• Competitors should not be able to enter the market
easily
Market-penetration pricing
Market-penetration pricing sets a low initial price in order to penetrate the market quickly and deeply to attract a large number of buyers quickly to gain market share
• Price sensitive market
• Inverse relationship of production and distribution cost
to sales growth
• Low prices must keep competition out of the market
Competitive pricing
Good, better, best pricing Loss leader
Multiple pricing
Optional product pricing
Penetration pricing
Premium pricing
Product bundle pricing
Product line pricing
Pricing Strategies
Competitive pricing - pricing your product(s) based on the prices your competitors have on the same product
Good, better, best pricing - charges more for products that have received more attention
Loss leader- refers to products having low prices placed on them in an attempt to lure customers to the business and to make further purchases
Multiple pricing - seeks to get customers to purchase a product in greater quantities by offering a slight discount on the greater quantity
Optional product pricing - used to attempt to get customers to spend a little extra on the product by purchasing options or extra features
Penetration pricing - used to gain entry into a new market
Premium pricing - employed when the product you are selling is unique and of very high quality, but you only expect to sell a small amount
Product bundle pricing - pricing—used to group several items together for sale
Product line pricing - used when a range of products or services complement each other and can be packaged together to reflect increasing value
Price-Adjustment Strategies
Psychological pricing occurs when sellers consider the psychology of prices and not simply the economics
• Reference prices are prices that buyers carry in their minds and refer to when looking at a given product– Noting current prices– Remembering past prices– Assessing the buying situations
Price-Adjustment Strategies
Promotional pricing is when prices are temporarily priced below list price or cost to increase demand
• Loss leaders• Special event pricing• Cash rebates• Low-interest financing• Longer warrantees• Free maintenance
Price-Adjustment Strategies
Risks of promotional pricing• Used too frequently, and copies by competitors
can create “deal-prone” customers who will wait for promotions and avoid buying at regular price
• Creates price wars
One Final Word
“ A product is not a product unless it sells.Otherwise, it’s just a museum piece…”
Ted Levitt