pricing policies and decisions

7/27/2019 Pricing Policies and Decisions

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Pricing Policies And Decisions

By: CA Dr. Arjun Lal Saini


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Clearing the Ground

Following pertinent prepositions will facilitate our discussion on

pricing:

Pricing is a crucail decision making issue since this can make

or mar an enterprise. Pricing should be considered as an intergral part of the

marketing mix management, not divorced from the rest of the

Ps.

Price, cost and volume are intricately inter-related with eachother and all these affect profit.


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Pricing based marketing considerations

Often, marketing considerations tend to dominate over others in determining prices of products or

services. On that count, there could be reversal of marketing-based pricing approach. Most

important of these are briefly discussed below:

High price

Going rate pricing

Sealed bid pricing

Geographical pricing

Uniform-delivered price system for handling transportation costs under which all buyers are

quoted with the same price, including transportation expenses.

FOB (free on board) plant or FOB origin: Price quotation that does not include shipping

charges. Buyer pays all freight charges to transport the product from the manufacturer.

Zone pricing system for handling transportation costs under which the market is divided into

geographic regions and a different price is set in each region.

Discount pricing

Discriminatory pricing

Penetration pricing strategy: involves the use of a relatively low entry price as compared with

competitive offerings; based on the theory that this initial low price will help secure market

acceptance .


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Pricing based on cost consideration

The methods and techniques discussed below are essentially cost-based andwould range from the conventional to the more sophisticated approaches.The discussions here are not aimed at specific types of products and markets.

1. Full cost Pricing

This appears to be most conventional and popular method of pricing, under

which the final price of a product is determined after adding some mark-upto the full cost or total cost of the product. The indirect taxes and duties,forwarding expenses should be added to the price. The full cost recoveryprice represents the desired minimum long-run price.

2. Conversion cost method

Proponents of the conversion cost method of pricing maintain that profitshould be based only on the value added by manufacturing i.e. cost ofproduction less material or through-put costs. E.g. It is used in Printingindustry and casting foundry.


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Continued.

3. Marginal cost pricing:

Marginal(Variable) costs are actually costs that can be directly associated with

a particular product. The out-of-pocket recovery price i.e. total variable cost

per unit is the minimum price below which a cash loss will be sustained.

Marginal Cost = Direct Material + Variable Overhead

Price of a Product/service = Marginal cost + Contribution (Fixed quantum)

Where,

Contribution = Sales Marginal cost


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Continued.

4. Return on Investment (ROI) pricing:

ROI is the most important yardstick in measuring business efficiency. ROI-based pricing is of particular importance in multi-product firms wherevarying capital investments are required for different product.

A formula for establishing a sales price which will yield a desired ROI is:

P = (F + V.Sv + R.Fc) / Sv1 R.Wc

P = Selling price per annum

F = Fixed cost per annum

V = Variable cost per unit

Fc = Capital investment in fixed assetsWc = Working capital

Sv = Annual sales volume in units

R = target rate of return on capital employed


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Special Pricing Problems

1. Price discrimination

Price discrimination or price differentiation exists when sales ofidentical goods or services are transacted at different prices from thesame provider.

However, product heterogeneity, market frictions or high fixed costs

(which make marginal-cost pricing unsustainable in the long run) canallow for some degree of differential pricing to different consumers,even in fully competitive retail or industrial markets. Pricediscrimination also occurs when the same price is charged tocustomers which have different supply costs.

Price discrimination requires market segmentation and some meansto discourage discount customers from becoming resellers and, byextension, competitors. This usually entails using one or more meansof preventing any resale, keeping the different price groups separate,making price comparisons difficult, or restricting pricing information.


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2. Pricing under recession:

Pricing during an economic downturn or recession is tricky. Too often,companies simply cut prices to attract more sales. The right pricing, however,can help a company compete and even thrive during difficult economic times.

3. Joint product pricing

Pricing for joint products is a little more complex that pricing for a singleproduct. To begin with there are two demand curves. The characteristics ofeach demand curve could be different. Demand for one product could be

greater than for the other product. Consumers of one product could be moreprice elastic than the consumers of the other product (and therefore moresensitive to changes in the product's price).

4. Spare Parts Pricing

It is almost a general practice in industrial marketing to make up profit by

selling spare of an equipment at very high prices.

5. Export Pricing

In general, export markets are highly competitive. The basic strategy for

pricing will depend on the purpose of export.


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Resale price maintenance

Resale price maintenance is the practice whereby a manufacturer

and its distributors agree that the latter will sell the former's

product at certain prices (resale price maintenance), at or above a

price floor (minimum resale price maintenance) or at or below aprice ceiling (maximum resale price maintenance). If a reseller

refuses to maintain prices, either openly or covertly (see grey

market), the manufacturer will stop doing business with it.

Resale price maintenance prevents resellers from competing

too fiercely on price, especially with regard to fungible goods.

Otherwise, resellers worry it could drive down profits for

themselves as well as the manufacturer.


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Conclusion

Pricing today is perhaps the most baffling problem

modern management has to face. The problem has

grown in magnitude and complexity recently because ofquite a few external factors, mostly uncontrollable from

the enterprise point of view. Such factors, to name but a

few, are steady transition from sellers market to buyers

market, government price regulations and price changeand recent inflationary trends.

pricing policies and decisions

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