PRICING ANALYSIS

1. PRICING ANALYSIS

2. WHAT IS PRICE ??? • Price is that amount of money charged for a product or service, or a sum of values that consumer exchanged for the benefits of having and using that product. • Price is determined by these three factors:: • a buyer is willing to pay, • a seller is willing to accept, and • the competition is allowing to be charged.

3. Price has many forms……… • University • Landlord • Banks • Transportation • Highway • Employee • Hotels • Doctor & Lawyer • Tuition • Rent • Interest • Fares • Toll • Wage • Room Rate • Fee

4. Why pricing is important ??? • Price is often a key determinant of market acceptance of the product or service and the amount of revenue that business organization will generate. • Since……… revenue is required to pay expenses and to produce profit, pricing is crucial. • Main objective :: • To gain an understanding of the basics of pricing in order to determine at what level of sales at a particular price, will enough revenue be produced to generate the wages and profits which the business houses requires.

5. PRICING POLICY • Pricing Policy refers to that policy by which a company determines the wholesale and retail prices for its products or services. • Setting an appropriate price is essential for every business concern. • Formulation of Pricing Policy:: • Objectives of Business. • Competitive Situation in which the Company places. • Product & Promotional Policies. • Conflicting Interests of manufacturers & middlemen. • Routinization of Pricing. • Active entry of Non-business groups into the determination of prices.

6. Objectives of Pricing Policy

7. FACTORS INVOLVED IN PRICING POLICY

8. PRICING METHODS

9. (A) COST-ORIENTED METHOD 1. Full Cost or Cost-Plus Pricing :: • It is a method of pricing goods or services, which is based on the total cost plus a percentage mark-up which is the profit for the producer. • Two Steps: • Determination of relevant full-cost. • Determination of what ‘plus’ the firm adopts. Cost Plus Pricing = Cost + Fair Profit Margin

10. Cont…………Full Cost / Cost Plus Pricing Advantages :: • More popular among industries. • This method is easy & convenient for a firm to adopt. • Reduces the cost of decision making. • It fulfils the objective of profit maximization. Disadvantages:: • While fixing the mark-up the firms ignore the customers. • It does not take into account of competitive forces.

11. (A) COST-ORIENTED METHOD 2. Marginal Cost Pricing :: • It is also known as Incremental or Direct Cost Pricing. • It is that pricing method according to which firms set the prices of their products by taking into consideration the marginal cost of production, which is the cost of producing one extra unit of the product. • Guidelines : • If pricing decision increases revenue more than cost, it should be made. • If pricing decision decreases revenue more than its cost, it should not be made.

12. (A) COST-ORIENTED METHOD 3. Target Pricing or Pricing for a Rate of Return :: • It is refined version of cost plus pricing. • In case of ROR pricing full cost based on ‘normal’ output and cost, which is not so incase of cost plus pricing; • In case ROR pricing mark-up is based on expected return on investment, cost plus pricing is based on arbitrary mark-up. 4. Programme Pricing:: • Such a pricing policy is quite popular in wholesale and retail trade. • In this…….price is related to supply price in order to cover own cost and profit margin.

13. (B) COMPETITION-ORIENTED METHOD 1. Going Rate Pricing:: • It is Setting a price for a product or service using the prevailing market price as a basis. Going rate pricing is a common practice with homogeneous products with very little variation from one producer to another, such as aluminum, steel, automobiles, electronic goods etc. 2. Sealed Bid Pricing:: • It refers to the case of bidding in the tender, companies know their competitors on the basis of our competitors pricing……..with the aim of signing the contract, its bid should be less than the competitors offer. Sealed bids is mainly used for pricing the tender transaction like in construction businesses etc.

14. (B) COMPETITION-ORIENTED METHOD 3. Customery Pricing:: • A method of determining the price for a good or service based on the perceived expectations of customers. Customary pricing is generally used for products with a relatively long market history of being sold for a particular amount. For instance tea or coffee. 4. Price Leadership:: • A situation in which a company sets a price for a product and this company's market share and brand loyalty is so strong that other companies are compelled to match or beat the price. The company that first changes the price is said to show price leadership. For example: Cadbury – Choclate industry, Hindustan Unilever – Soap Industry and so on………….

15. (B) COMPETITION-ORIENTED METHOD 5. Cyclical Pricing:: • When pricing is based on the basic assessment of general economic environment or fluctuations in business cycle despite of the fact that the cost of production remains unchanged. Like in a condition of depression – firm has to reduce the price to continue in the market.

16. (C) PRICING BASED ON OTHER ECONOMIC CONSIDERATIONS 1. Administered Prices:: • Statutory fixed by the Govt. like fair price shops, fertilizers, coal, steel etc. 2. Dual Pricing:: • Covered under the administered price as well as market price for instance sugar in India. 3. Price discrimination / Differential Pricing:: • Time price differentials. • Use price differentials. • Quality price differentials. • Quantity price differentials. • National areas price differentials.

17. Pricing Strategies for New Product • A business may elect to price a new product above, in-line, or below its competitors. • A variety of other pricing strategies adopted by the business forms, depending upon the market conditions and the image the form wishes to project for its product. • Two Popular methods are as follows:: • Skimming pricing. • Penetration pricing

18. Skimming Pricing • Skimming pricing is a pricing strategy in which a marketer sets a relatively high price for a product or service at first, then lowers the price over time. • For example - DVD players. Initially in 1990s when DVD players were launched and the price was $500 and $400. By 2001 the prices were skimmed to less than a $100. By 2012, DVD players were available for as low as $50 or $60. Advantages: • It helps the company in recovering the costs which are associated with the development of new product. • If the company caters to consumers who are quality conscious. Disadvantages: • This strategy can backfire if there are close competitors. • Price skimming is not viable option when there are strict legal and government regulations regarding consumer rights.

19. Penetration Pricing • Penetration pricing is the pricing technique of setting a relatively low initial entry price, often lower than the eventual market price, to attract new customers. • For example – FMCG Industry, Nirma Surf, Rasna Drink etc………… Advantages: • Easy acceptance of a new product or service by the consumers. • Low price helps in controlling the cost there by cost efficiency is achieved. • Low pricing will discourage competitors from matching the offering. Disadvantages: • It establishes long term price expectations for the product, and image pre-conceptions for the brand  and company • Low profit margins may not be sustainable long enough for the strategy to be effective.

20. Specific Pricing Problems:: Pricing over the Life Cycle of a Product

21. Product Life Cycle & its Characteristics

22. Product Line Pricing • Product line pricing is a pricing strategy that uses one product with various class distinctions. • Penetration Establishing and adjusting the prices of products within the product line. • Captive pricing :: Basic product low, but items required to operate or enhance it can be at high level. • Premium Pricing :: Highest quality and more versatile version given at a very high price. • Price Lining :: Setting a limited number of pricing for selected group or lines of merchandise.

23. Cont…………. Definition :: According to Armstrong and Kotler, ‘Product line pricing is a type of a pricing strategy that a company uses when it develops a line of products in the same family, rather than just one product.’ • For example :: A car model that has various model types that change with performance and quality. • This pricing process is evaluated through consumer value perception, production costs of upgrades, and other cost and demand factors. Relationship between Multiple Products are as follows: • Demand inter – relationship. • Production inter – relationship.

24. PRICE FORECASTING • Price Forecasting is the estimation of the price of the products by business concerns in the near future point of time. • It is an important part of anticipating both future price levels and the risk that anticipated prices will not be achieved is developing strategies for forecasting prices. • Two types of price faced by firms: • Prices of raw materials & other factors of production; • Prices of products which firm produces & sells.

25. Steps in Price Forecasting • Price movements. • Seasonal Variations. • Cyclical Variations. • Estimate the prospective demand – supply conditions. • Nature of commodities & market conditions: • Whether it is main product or by-product. • Prices of related goods. • Government intervention. • Other trade barriers.