BASIC METHODS FOR SETTTING

PRICES

Presented by:

Mian Nirwan Farooqi 6315

METHODS USED WORLDWIDE

Over the years, many different methods have been used by individual companies to establish base prices for their products.

Most of these approaches are variations of following methods:

1) Prices are based on total cost plus a desired profit

2) Prices based on market demand and supply

3) Prices based on competitive market conditions

COST-PLUS PRICING Price are based on total cost-plus a desired profit

Cost-plus pricing means setting the price of one unit of a product equal to unit’s total cost plus the desired profit on the unit.

The total cost may include many type of costs like:

Total fixed cost

Average fixed cost

Total variable cost

Average variable cost

Marginal cost

The profit can be fixed but usually a percentage is defined

e.g. 5% 10% on total cost of the product.

COST-PLUS PRICING

Take a look at this diagram which show how price is determined and finally available for customer.

COST-PLUS PRICING Let’s suppose that a company manufactures stationary

items ball pens, pointer and markers.

The marker cost as Rs 14 for body

Rs 4 for ink

Rs 6 tip

Rs 2 for packaging

Rs 4 for trans

The total cost will be Rs 30

If company enjoy a profit of 20% i.e. (Rs 6) on product then

The Price for this marker will be Rs 36.

and if profit ratio is set as 10% then final price will be Rs 33

BREAK EVEN ANALYSIS A break even point is that quantity of output (number of

units produced) at which the sales revenue equals the total costs, assuming a certain selling price.

FORMULA:

In simple words when a new business is started or new product is introduced, a time occur when all expenses occurred due to that product are recovered by revenue.

BREAK EVEN ANALYSIS

It means the break-even point depends upon the selling price

HIGHER THE SELLING PRICE, EARLIER BREAK EVEN WILL BE ACHIEVED and vice versa

It helps in determining selling price when we set price on basis of market demand

The following diagram illustrates that how SELLING PRICE helps in achieving break-even point of a company.

BREAK EVEN ANALYSIS

Break-Even points achieved at different point at different prices.

PRICES BASED ON MARKET DEMAND SUPPLY

This method of price setting involves balancing demand with costs to determine the best price for profit maximization.

The companies whose goal is to maximize profit while ignoring market share, expansion, repute and other aspects; can adopt this method for setting prices for their products.

PRICES BASED ON MARKET DEMAND SUPPLY

Take a look at following demand and supply schedule to understand that how a company can set prices according to market demand supply.

PRICES SET IN RELATION TO MARKET ALONE

A firm is most likely to use this method when the market is highly competitive and firm’s product is not differentiated significantly from its competitors.

To some extent, this method of pricing reflects market conditions that parallel those found under perfect competition.

PRICES SET IN RELATION TO MARKET ALONE

Here prices are determined according to fluctuating market competition conditions

Some time a company may give special offers or discount and packages to attract more and more customers.