5.

PRICING PRACTICES AND BUSINESS DECISIONS

Price meaning:

Price is refers to the sum of money for which anything is brought, sold or offered for sale.

Meaning of pricing:

Pricing refers to the process of determining what a company will receive in exchange for its product.
It is the method adopted by a firm to set its selling price.

Pricing policy:

Pricing policy refers to the policy of setting the price of the product and services by the management
after taking into account of various internal and external factors and its own business objectives.

In other words pricing policy refers to the policy by which a company determines the wholesale and
retail prices for its products and services. A pricing policy is usually based on the cost of production,
provision for margin of profits for example cost plus pricing.

Objectives of pricing policy:

There are some of the following objectives are to be considered while fixing the prices of the
products.

1. Profit maximization : the primary objective of any business firm is to maximize its profits. The
pricing policy is an important instrument to achieve this objective. Hence price will be fixed in such a
manner that it recovers cost of production , maximizes the sales revenue and profit.

2. Price stabilization : while fixing up the prices the business concern ensures that the prices fixed
by its remains constant over a period of time . stable pricing policy can win confidence of the
customers and may add to the goodwill of the company ,which in turns increases the reputation and
image of the firm.

3. Facing competitive situation : another objective of pricing policy is to face the competitive
situations in the market . so the firm should fix the price of its products keeping the price of
competitors price in mind.
4. Capturing market : another objective of pricing policy is to capture the market, the firm should
comparatively fix low prices for its product .with the aim, the firm sells its products even at cost
prices in the initial stages . this may proves to be beneficial in the long run .

5. To established equilibrium between demand and supply : pricing policy is used as a tool in order
to maintain equilibrium in the market .

6. Survival : in these days of sever competition and business uncertainties , the firm must set a prices
which would safeguard the welfare of the firm . a firm is always interested in survival .

7. Service motive : if the main objective of the business is to provide service to the society rather
than making more profits then moderates pricing policy may be followed .

8. Long run welfare of the firm : the main objective of pricing policy has to designed in such a way as
to fulfil the long run interests of the firm keeping internal conditions and external condition s or
environment in the mind .

9. Entry in to the new market : entry into new market s speaks about the successful story of the
firm. The price set by the firm has to be so attractive that the buyer of the other markets have to
switch over to this particular products.

10.Achieving target returns : the price of the product is to calculated as to earn the target returns
on cost of production , sales and capital investments . the targets are set according to the position of
individual firm . hence , the prices of the products are so calculated as to earn the target returns on
the costs.

The general considerations / factor considered in formulating pricing policy /factor

affecting pricing policy :

A number of factors that are of general in nature have to be taken into account while fixing the most
ideal price for a product. Some of them are:

1. Objectives of the firm: every firm has certain objectives, which are to be achieved the pricing
policy should be in accordance with the objectives of the business firm. Some of those objectives
are:

a) Survival or continued existence of a firm in the market.

b) Achieving higher rates of growth.

c) Market share expansion.

d) Leadership of the industry.

e) Preventing competition

f) Profit maximisation/sales maximisation etc.

2. Competitive situation in the market: fixing a particular price depends on the nature of the
market in which the firm is operating. Whether it is operating under monopoly, oligopoly, duopoly or
perfect competition. Market situation decides the pricing policy of a business firm apart from it,
several other considerations also decide the pricing policy. Some of them are:

1) Number of buyers and sellers ,size of the plant ,availability of substitutes

2) Existence of potential competitors

3) The degree of responsiveness of consumer

4) Possibilities of adopting price discrimination policy

5) Product differentiation

6) Market position enjoyed by a firm

3. Cost of production: If the cost of production is high, the price of the product will also be high and
if lower is the cost of production then the selling price will also be low.

4. Distribution channel: Longer the distribution channel higher would be the price and if consumers
can get the desired product directly from the manufacturer then the selling price will affect the
pricing policy.

5. Elasticity of demand: A business firm may fix higher price for its product – if it has inelastic
demand in the market and on the other hand a business firm has to reduce the price of its product –
if it has elastic demand in the market.

6. Business cycles: During recession, prices are reduced and during prosperity higher prices may be
charged. This is because during recession the income level of the people will be low and during
prosperity the income level of the people will be high.
7. Government policies: Government controls, restrictions and regulations, increase in administered
prices of inputs, increase in the rate of taxes etc will definitely push up the prices. Tax concessions,
subsidies, tax rebates etc will reduce the price level.

8. Social and ethical considerations: Social obligations and responsibilities in general, ethical and
moral standards adopted by a firm policy. If the main objective of a business firm is to provide
services to the people, then it may provide goods even at cost price.

9. Product stages in the life cycle: During the initial stages of the product a firm may charge low
price and once it is established in the market, then it may charge higher price for the same product.
Hence pricing policy may be different in different stages of products life.

10.Buying patterns of consumers: high purchase frequency of the product is to be priced less and
low purchase frequency item may be sold at high prices.

Methods of pricing policy (pricing methods):

Pricing methods refers to the use of a specific type of information on prices to represent the
evolution of price in the price index competition .this includes :

1) Cost plus pricing

2) Going rate policy

3) Target returns pricing

4) Administrative pricing

5) Psychological pricing

6) Marginal cost pricing

7) Product line pricing

8) Competitive pricing

9) Dual pricing

10) Transfer pricing

1. Cost plus pricing : cost plus pricing or full cost pricing refers to the price of the product by adding
certain cost percentage of profit to the average total cost of production .

Cost plus pricing = Cost + Profit

Advantages of cost plus pricing :

 Easy to calculate
 It safeguard the interest of the firm against risks when demand is uncertain
 It is economical for decision making by the firm
 It protect the firm from price war

Disadvantages or limitations of cost plus pricing :

 It completely ignores consumer preferences and demand .so it a one sided approach.
 It does not take into account the competition and competitors pricing policy.
 It ignore future costs in pricing decision.

2. Going rate policy : It is a competitive pricing method where in a firm tries to keep its price at the
average level charged by the industry. Under this method the prices of a product is based on prices
of existing products in the market. The going rate pricing method is used in pricing paper, cement,
fertilizers, steel, petrol and chemical industries

Advantages:

 Going rate policy is useful where it is difficult to measure costs.

 Yields fair return to all firms in the industry.
 This method is most conducive for industry’s harmony.
 It is flexible in responding to changing market conditions .

 Disadvantages:

 This pricing can damage your business in the long run.

 It does not considered the cost structure and target profit of your business
 It may devalue your business’s current brand undermine your current customer base.
 It may result in price wars if your pricing are set below competitors prices.

3. Target return pricing :price is determined along with planned rate of return on investment. The
rate of return is to be translated into normal percentage of profit margin on the costs. The profit
margin is determined on the basis of normal rate of production.
Example : if the 20 lakhs is an investment , rate of return is 20 % , unit of cost is 20 and sales were
50,000 units.

Formula : TRP = unit cost + ( desired return * investment on capital) _ unit of sales

= 20+ ( 0.20 *20,00,000 ) _ 50,000

= 28

4. Administrative price : according to Keyness ; price is determined by an individual producer or

seller not purely by the market forces.

In other words ; The term administered prices was introduced by Keyness for the prices charged by a
monopolist and therefore, determined by considerations other than marginal cost. It is managed or
prescribed price. A monopolist being a price maker consciously administers the price of his product.

5. Psychological pricing : It is based on the price of factors such as signals of product quality, popular
price points and what the consumer perceives to be fair psychological pricing or price ending is a
little less than a round number, ex. Rs.499, 999 etc.

6. Marginal cost pricing : it refers to the practice of setting the prices of a product to equal the extra
cost of producing an extra unit of output .

Formula : MCP = change in total cost out put /change in output

7. Dual pricing : It refers to the practice of setting prices at different levels depending on the
currency used to make the purchase. Dual pricing may be used to accomplish a variety of goals such
as to gain entry into foreign market by offering unusually low prices to buyers using the foreign
currency.

8. Transfer pricing : It refers to the setting, analysis, documentation and adjustment of charges
made between related parties for goods, services or use of property.

9. Product line pricing : It is a pricing strategy that uses one product with various class distinctions.
Example would be a car model that has various model types that changes with performance and
quality this pricing process is evaluated through consumer value perception, production cost of
upgrade and other cost and demand factors.

10. Competitive bidding : it aims at obtaining goods and services at the lowest prices by
stimulating competition and by preventing favouritism.
Objective of pricing :(give our own explanation)

• Market penetration objective.

• Market skimming objective.

• Target rate of return objective.

• Price stabilisation objective.

• Market share objective.

• Survival objective

Determination of pricing :

Cost

 Profit margin

 Market

 Supply and demand

 Competition

 Govt policy

Meaning of skimming pricing strategy:

skimming pricing is a pricing strategy in which a marketer sets a relatively higher prices for a product
or services at first then lower the prices over a time .

In other words ; the practice of skimming pricing involves charging relatively high prices for a short
time where a new, innovative, or much improved product is launched in to the market .

Meaning of penetration pricing :

it’s a pricing technique of setting a relatively low initial entry prices, often lower than the eventual
market prices to attract new customers.
Meaning of dumping :

it’s a unethical in many countries an illegal practice in pricing . it is a informal name for the practice
of selling a product in a foreign market or country for less than either a) the price in domestic
country b) cost of making the product it’s a illegal in some countries because they want to protect
their own industries from such competition .

Meaning of price leadership :

it is the situation in which a market leader sets the price of a product or services for which
competitors feels compelled to match that prices.
Important questions :

1) What is penetration price?

2) What is going rate pricing?

3) Give the meaning of pricing ?

4) What is price leadership ?

5) What is skimming pricing ?

6) What is dumping ?

Important question for 5 -15 marks :

1) Explain the methods of pricing ?

2) Explain the objectives of pricing ?

3) Discuss the objectives of pricing policy ?

4) What is meant by pricing policy ? explain the general consideration involved in formulating the
pricing policy ?

5) Explain the various phases of product life cycle with diagram ?Market behaviour and cost analysis