METHODS OF PRICING

Group 10 | Marketing Management II

26 November 2015

Submitted By-Rohit Kawade (133)Simmy S Nigam(135)Swagat debbarma(137)Debojyoti Sanyal(141)Anurag Sarode(143)Abhishek Tigga (145)

Pricing Methods1. Mark Up Pricing2. Absorption cost3. Target- Return Pricing4. Perceived Value Pricing5. Going Rate Pricing6. Auction- Type Pricing

COST ORIENTED

MARKET ORIENTED

Mark Up Pricing• The selling price is fixed by adding Mark-up or Margin to its cost.• Usually used by: Distributers, Marketing firms etc..• Slower the turnaround of the product larger the margin and vice

versa.• Mark Ups are high on seasonal items, speciality items, demand

inelastic items etc.• Mark up price = unit cost /( 1- Desired return on sales )

How to Calculate • A FMCG company sells a bar of soap to retailer .• Unit Cost= VC+FC • VC per unit = Rs.10, Total FC= Rs. 300000• Number of units produced= 50000• Unit cost= 10+ (300000/50000)= Rs 16• Now manufacturer wants to earn 20% mark up on sales• Mark up price = unit cost/(1- desired return on sales)= 16/(1-0.2)=Rs20

Example

Demand inelastic item Seasonal Items

Example

Cost= US$ 0.08Price= US$1.08Mark Up= 1,250%

Jewellery

Absorption Cost Pricing• Mainly used by manufacturing firms.• It uses standard costing techniques.• It includes : Fixed cost Variable cost Selling and administering costAdvertisement cost• It is also known as full cost pricing.

+ PROFIT

ExampleDelhi - 5.04lakhsChennai - 5.44lakhsHydrabad - 5.40lakhsMumbai - 5.37lakhsBangalore - 5.59lakhsPune - 5.24lakhs

Target –Return Pricing• Similar to Absorption cost pricing.• The difference is in fixing the profit margin.• The profit margin/ mark up is fixed by considering the ROI.• Firm will have return objectives, like 5% of invested capital, or 10% of

sales revenue.• Then you arrange your price structure so as to achieve these target

rates of return.• Market leaders or monopolists uses this pricing strategy.

How to calculate• Investment of a pen manufacturer = Rs1million • Total sales 50000• Expected ROI= 20%, Unit cost of a pen =Rs 16• Target return price= Unit Cost +( Desired return * Invested capital)/ Unit sales• TRP= 16+(0.2* 1000000)/50000 = Rs 20

Example

Market Leaders ensuring target sales

Example

ITC Cigarettes

Perceived Value Pricing• Pricing on Perception• To increase prices without damaging customer relationships is by

adding to the perceived value of your product or service

Examples

Examples

John Deere Tractor

Perceived valueDurabilityReliabilityServiceLonger warranty

Examples

Going Rate Pricing• Setting a price based on market price basis.• Used for homogenous products/ Oligopolistic market• Costs are difficult to measure/competitive response is uncertain

Competitors ‘parity method

Premium pricing

Discount pricing

Examples

Telecom Industry Airlines Industry

Examples

Banking Industry Electronic goods

Auction Type Pricing• electronic market places are selling a diverse range of products to dispose of

inventories and goods• Three major types of auctions-English Auctions (one seller many buyers)Dutch auctions (one seller many buyers and vice versa)Sealed bid Auctions (supplier submit only 1 bid) Example- Government Biddings

Examples of English Auctions

Examples of Dutch Auctions

1 buyer many sellers

Google IPO Bidding1 seller many buyers

Thank You!!!