6 Pricing Approches

PRICING APPROACHES
 If the price is set too high, not find any demand & if it is too
low not able to cover costs & incur losses.
 Setting prices is a complex problem, in the beginning it must
be reviewed & reformulated from time to time.
General Considerations :
1. Kind of Market Structure : Monopolistic competition set its
pricing policy. The number, size & substitute products
supplied by rival firms, Potential competition, Consumer
acceptance of the given product, Advertisement, cross
elasticity's.
2. Objectives of Business : the firms overall goals like-survival,
market share & profit.
3. Flexibility : flexible to meet the changes in the demand
4. Conflicting Interest of Manufactures & Middlemen
OBJECTIVES OF PRICE POLICY
1. Survival
2. Rate of Growth & sales Maximization
3. Market Shares
4. Target Return on Investment
5. Preventing Competition
6. Profit
7. Service Motive
8. Price Stabilization
FACTORS INVOLVED IN PRICING POLICY.
 Costs
 Demand and Consumer Psychology
 Competition
 Profit
 Government policy
METHODS OF PRICING STRATEGIES
 Cost, Customers & Competition [3Cs] are crucial in the product
pricing, four methods -Cost plus or full cost Pricing, Going rate
policy, Pricing for a rate of return, Administered prices
1. Full Cost or cost Plus pricing -most commonly adopted method.

Cost of a product is estimated & a margin of profit is added to
determine the price.
Cost plus = Cost + Fair Profit
Fair Profit : a fixed percentage of profit mark-up. It is arbitrarily

determined, it is determined at 10 percent.
P= AVC + M
Shortcomings
 ignores consumer’s preference & demand.
 Not consider the effect of competition.
METHODS OF PRICING STRATEGIES- CONTINUE
2. Rate of Return Pricing -price is determined along a planned rate

of return on investment. The mark up percentage of profit
margin is obtained by multiplying capital turnover by the
goal rate of return.
 Thus, if capital turnover (C) is 0.5 and the goal rate of return
(R) is 12 per cent on invested capital, then:
Mark- up Profit Margin = C * R
= 0.5x * 12 = 16 per cent
3. Going Rate Pricing -The going rate pricing is opposite of full
cost. Firm tries to adjust its own price policy with the general
pricing structure prevailing in the industry or market.
 This is adopted when costs are difficult to measure; to avoid

tension of price rivalry or price leadership in the market.
4. ADMINISTERED PRICE - it is decided & arbitrarily fixed by the
government. Administered prices are the results of government
intervention. The characteristics are: fixed by the government,
legally enforced, regulatory in nature, corrective measures.
PRICING FOR ESTABLISHED PRODUCTS
 Pricing Below the Market-Price - firm wants to expand its

product-mix with a view to utilizing its unused capacity.
 Pricing at Market Price -the most reasonable pricing strategy.

The strategy is also adopted when the seller is not a ‘price
leader’.
 Pricing Above the Existing Market-Price - to achieve a prestigious

position among the sellers in the locality, common in prestige
goods ‘Veblen Effect’.
PRICING A NEW PRODUCT
A. Skimming Price Policy: It is adopted where close
substitutes of a new product are not available.
• This pricing strategy is intended to skim the cream of the
market, i.e., consumer’s surplus, by setting a high initial
price, in case of consumer durables.
• The initial high price would generally be accompanied by

heavy sales promoting expenditure. The post-skimming
strategy includes a series of small price reductions.
B. Penetration Price Policy: Adopted for new products which

have substitutes.
• Fixing a lower initial price designed to penetrate the

market as quickly as possible & intended to maximize the
profits in the long-run. A low price of the product in the
initial stage.
 Loss Leader Price: Retailers often price certain items at very low
levels or even at loss to attract large number of extra customers
to their stores thereby expanding their sales of higher priced
items & adding to total profit.
 Mark - up– when the retailer follow fixing the price, it covers the
costs & leaves a reasonable profit margin.
 Mark - down – to the cost of goods purchased, he adds certain

margin (15%) & charges customers accordingly, in case certain
goods are not sold within reasonable time, price is reduced
(10%)
PRICING STRATEGIES- CONTINUE
 Transfer pricing: It refers to price of the intermediate products

sold by semiautonomous division of the firm. It is an
intermediate product for which there is no external market is
the MC of production. It is a pricing of intra- firm transfer
product. E.g. Refrigerator & compressor
 Peak Load pricing: certain goods are demanded in varying

amounts.E.g. Electricity, Telephone,railway travel.
 Product Bundling: It is practice of selling two or more product

together for a single price. Products are available as package

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PRICING APPROACHES

1. Full Cost or cost Plus pricing -most commonly adopted method.

Fair Profit : a fixed percentage of profit mark-up. It is arbitrarily

2. Rate of Return Pricing -price is determined along a planned rate

 This is adopted when costs are difficult to measure; to avoid

PRICING FOR ESTABLISHED PRODUCTS

 Pricing Below the Market-Price - firm wants to expand its

 Pricing at Market Price -the most reasonable pricing strategy.

 Pricing Above the Existing Market-Price - to achieve a prestigious

• The initial high price would generally be accompanied by

B. Penetration Price Policy: Adopted for new products which

• Fixing a lower initial price designed to penetrate the

 Mark - down – to the cost of goods purchased, he adds certain

 Transfer pricing: It refers to price of the intermediate products

 Peak Load pricing: certain goods are demanded in varying

 Product Bundling: It is practice of selling two or more product

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