PRICING PRICING ( for SIKSIL 2017)( for SIKSIL 2017)

Maxwell RanasingheMaxwell RanasingheB.Sc. ( Business Administration) B.Sc. ( Business Administration)

Hons. MAAT, Attorney at Law, Hons. MAAT, Attorney at Law, CPM ( New Haven- USA) CPM ( New Haven- USA)

PRICINGPRICING

• IMPORTANCE OF PRICING• PRICING OBJECTIVES• FACTORS TO CONSIDER IN PRICING• CONCEPTS OF COSTING FOR PRICING• PRICING STRATEGIES• SETTING THE FINAL PRICE

Pricing the revenue makerPricing the revenue maker

• The Price is the amount of money, goods or services that must be offered to get a product ( sum of all the values that consumers exchange for the benefit of having or using the product or service)

• Price is expressed in different terms such as Rent, Tuition fees, fare, interest, premium, salary, taxes and commissions

Role and importance of pricingRole and importance of pricing

- it generates income- it influences buyer- it is the most flexible- it could lead to gain or loose market- Customers often equate price with quality- Price connects customers and sellers at the point of exchange- Customers often use price to compare

competing products- for certain products price could be main criteria

in selection

Pricing ObjectivesPricing Objectives

• Financial Objectives• Profit - Return of investment

• - Profit maximisation• Cash Flow

• Sales and Marketing ObjectivesMarket Share and PositioningVolume of salesStatus Quo

• Survival ( cover expenses in short run)

Factors to be considered in Factors to be considered in pricingpricing

• Cost of the product• Customers• Channel requirements• Competitors• Compatible with objective of the company

& other Ps of M Mix • Legal aspects• Principals of Taxation

Pricing should be in line with Pricing should be in line with other elements of the marketing other elements of the marketing

mixmix- The positioning of the product- Quality of the product- Distribution- Promotion- Persons involved in the product- Processes adopted - Physical evidence

Now talkNow talk

Concepts of Setting PricesConcepts of Setting Prices

• Price Sensitivity- The general trend is that people are sensitive to prices on items that are purchased regularly and the items that cost a lot. They are less sensitive to prices on products that they do not buy regularly and to the items that cost less.

• Estimating Demand Curves- This will allow the marketer to find out demand at different levels of pricing, charge different prices at different markets, offer discounts at selected outlets to find out the demand.

• Price Elasticity of Demand- The percentage of demand that changes with the percentage of change in the price is elasticity of the demand. If price changes 10% and the demand changes at a higher rate ( e.g.. 20%) then the demand is elastic. If the price changes 10% and the demand changes at a lower rate ( e.g. 5%) then the demand is inelastic

Concepts of costing for pricingConcepts of costing for pricing• Cost and Levels of production- There are three types of

cost that is Fixed Cost( FC) ,Variable Cost (VC) and Total Cost (TC)

• Fixed Cost (FC) does not change with the increased production e.g. Rent, Rates and Loan Interest.

• E.g. Monthly rent Rs. 100,000 will have to pay even if there is no production or even if there is a production of 10,000 units

• Variable Cost (VC)• The cost that changes with the increased production. E.g..

Raw materials • Total Cost ( TC)• The sum of the FC and the VC

• Contribution• Contribution is the amount that contributed by

sales to recover the Fixed Cost when Variable Cost is deducted from the Sales Price.

• Selling Price (Rs. 40) – Variable Cost ( Rs. 15)= Contribution (Rs. 25)

• So the contribution will help a firm to find out many important aspects such as Break Even Point, how many should be manufactured to earn a given amount of profits etc,.

Costing FormulasCosting Formulas

• Fixed Cost (FC)• Selling Price (SP)• Contribution per unit (CPU)= SP-VC• Break Even Point= Income=Total

Expenses( No profit or loss)• Units to BEP= FC/CPU• Units to Expected profit= FC+Profit/CPU

Cost and PricesCost and Prices

• A garment industry is sewing socks and the cost elements are as follows

• Fixed Cost Rs. 100,000• Variable Cost Rs. 15 per unit• Selling Price is Rs. 40.00• What is the BEP ?• If the company wants to earn a profit of

Rs. 200,000 how many units it should manufacture ?

Variable costVariable cost

Production - Units

Cloths meter p/u

PricePer meter

Variable Cost

0 1.5 10 01000 1.5 10 150002500 1.5 10 375005000 1.5 10 750006250 1.5 10 93750

Fixed CostFixed CostUnits produced Fixed cost-

e.g. RentTotal Fixed cost

0 100000 100000

1000 100000 100000

2500 100000 100000

5000 100000 100000

6250 100000 100000

Total Cost & IncomeTotal Cost & IncomeUnits produced

Variable Cost=VC @ 15 per unit

Fixed cost =FC

Total CostVC+FC

Total Income Selling Price Rs. 40.00

0 0 100000 100000 0

1000 15000 100000 115000 40000

2500 37500 100000 137500 100000

5000 75000 100000 175000 2000006250 93750 100000 193750 250000

REVENUE AND COST

0

50000

100000

150000

200000

250000

0 2500 5000 7500 10000UNITS

CO

ST/R

EVEN

UE

VCFCTOTALREVENUE

BEP4000 unitsRev.

160000

• Break Even Point• Sale Price Rs. 40.00• Variable Cost Rs. 15.00• Contribution ( 40- 15) Rs. 25.00• BEP = Fixed Cost• Contribution• BEP = 100000 = 4000• 25• Once the BEP is reached all the FC is recovered. Then

the contribution becomes a profit. The you can manipulate the pricing in many ways.

• How many items should be manufactured to earn a profit of Rs. 200,000

• FC + Profit• CPU• 100000 + 200000 = 12000• 25• 40 x 12000 = 480,000• VC 15 x 12000 = 180,000• FC = 100,000• Profit = 200,000

Now talkNow talk

Pricing StrategiesPricing Strategies

• Cost Based (Internal Oriented) Pricing

• Demand (Market/ Customer) Based Pricing

• Competitor Based Pricing

Cost or Company Oriented PricingCost or Company Oriented Pricing

• Cost plus pricing/ Mark up pricing. ( determine the sellers total cost and then add a specified amount of percentage. A company may have an idea of what profit it should earn. Therefore after taking all internal cost factors into consideration, this predetermined profit margin from the cost will be added to the cost. It is called the mark up )

• . E.g. What would be the price of a product costing Rs. 16.00, if Markup on cost is 20%

• Mark up on cost : 16 x 1+.20 = 19.20

• Margin on sales price pricing• The difference in this calculation is that

profit margin is based on sales price not the cost of the product is given for calculation

• Cost Rs. 16.00 calculate the price with a mark up/ margin of 20% on sales

Margin on salesMargin on sales

• formula = cost • 1 – markup

161 – (20/100)

Rs. 20.00

Customer Oriented Pricing Customer Oriented Pricing StrategyStrategy

• Market Skimming ( innovative, inelastic demand, high value, high demand and low supply – e.g.. celltel)

• Market Penetrating( “mee too” products, quick entry into market, greater volume to achieve to get economies of scale, greater market to catch)

• Psychological ( emotional factor, image, quality e.g.. Bata 999.90 rather than Rs. 1000 , Rolex very high price and image)

• Value based ( customer perceived value, find out how much customers are willing to pay for the product through market research)

• Promotional Pricing Strategy ( Cash rebates- Special event pricing- Loss leader ( setting low prices on certain items and attracting customers and assuming they will by other products at normal prices)- Low Interest Deals – Group Pricing

Competitor Oriented PricingCompetitor Oriented Pricing

• Competitive bid pricing( matching or improving over the competitors price. Especially used in Tenders. You need to know the market well and the requirements of the customer well to quote price in this format)

• Competitive advantage pricing ( Price may be the same but you offer additional services E.g. Petrol shed offers free window cleaning for customer who pump petrol in their station)

Now talkNow talk

Setting the final priceSetting the final priceCost 12500

Overheads per unit 1000

Discounts( cash/Trade in) 1000

Margins/Profits for distributors 2000

Defects replacement 750

Repairs within guarantee 250

Company profits ( 20% on cost) 2500

Taxes 3000

Final price 23000

Questions and Answers and Questions and Answers and Exam TechniqueExam Technique

Vibagayak Nethiwa Pass karanne nedda ?

Vibage fail vunath marketing karanna puluwni !!!!!!

Hope u got the idea of pricingHope u got the idea of pricingEnd PCM GSS BK