Pricing Methods

Pricing Strategies
In a complex business world, business firms

follow a variety of pricing rules & methods depending on the conditions faced by them.

Pricing Strategies
1) COST-PLUS PRICING

This is also known as mark-up pricing, full cost pricing , or average cost pricing. The general practice under this method is to add a fair % of profit margin to the average variable cost (AVC). Price = AVC + AVC (m) Here AVC = Average Variable cost m= mark-up percentage AVC (m) = Gross profit margin The mark-up % (m) is there to cover average fixed cost (AFC) & net profit margin (NPM) AVC (m) = AFC +NPM

Pricing Strategies
2) Multiple product pricing All most all firms have more than one product in their line of production. For e.g. Various models of TV sets, refrigerator etc produced by the same company may be treated as different products for at least pricing purpose. Each product has different AR & MR curves and that one product of the firm competes against the other product. The pricing under these conditions is known as multi product pricing or product line pricing.

Pricing Strategies
3) Pricing in Life cycle of a product The life cycle of a product is divided into five stages: a) Introduction b) Growth c) Maturity d) Saturation e) Decline The pricing strategy varies from stage to stage over the life cycle of the product, depending on the market conditions. From the pricing strategy point of view ,growth and maturity stages may be treated alike.

Pricing Strategies
3) Pricing in Life cycle of a product 3a) Pricing a new product: Pricing policy in respect to a new product depends on whether or not close substitutes are available or not. On this basis two strategies are followed: a) Skimming Price policy b) Penetration price policy Skimming price policy : This pricing policy is adopted where close substitutes of anew product are not available. This pricing strategy is to skim the cream of the market. In this strategy firstly the prices are increased and then later on reduce.

Pricing Strategies
3) Pricing in Life cycle of a product Skimming price policy : The appropriate occasion for price reduction is the time of saturation of the top level demand ,or when the strong competition started. Penetration price policy This policy involves a reverse strategy. This pricing policy is adopted generally in the case of new products for which substitute are available. This policy requires fixing a lower initial price designed to penetrate the market as soon as possible , and is intended to maximize the profits in the long run.

Pricing Strategies
3) Pricing in Life cycle of a product Penetration price policy Therefore the firms pursuing the penetration price policy set a low price of the product in the initial stage, as the product catches the market ,price is gradually raised up.

Pricing Strategies
3) Pricing in Life cycle of a product 3b) Pricing in Maturity period Maturity period is the stage between growth and decline stage. Maturity period may also be defined as the period of decline in the growth rate of sales and the period of zero growth rate. In this the manufacturer rather move in the direction of product improvement and market segmentation.

Pricing Strategies
3) Pricing in Life cycle of a product 3c) Pricing a product in decline The product in decline is one that enters the post-maturity stage. In this stage ,the total sale of the product starts declining. The first step in this strategy is to reduce price. The product should be reformulated & remodeled to suit the consumers preference. As a final step in the strategy ,the advertisement expenditure may be reduced drastically or withdrawn completely , and rely on the residual market.

Pricing Strategies
Pricing in relation to established products In pricing a product in relation to its well established substitutes, generally three types of pricing strategies are used: a) Pricing below the prevailing market price b) Pricing at par with the market price c) Pricing above the market price. 4a) Pricing below the prevailing market price: Pricing below the prevailing market price is generally preferred under two conditions. First if a firm wants to expand its product mix with a view to utilizing its unused capacity in the face of tough competition with the established brands ,the strategy of pricing below the market price is generally adopted. Second this technique is more useful in case of innovative products.
4)

Pricing Strategies
4) Pricing in relation to established products 4b) Pricing at par with the market price This strategy is considered to be the most reasonable pricing strategy for a product which is being sold in a strongly competitive market. This strategy is also adopted when the seller is not a price leader. It is rather a price taken in the oligopolistic market. 4c) Pricing above the existing market price This strategy is adopted when a seller intends to achieve a prestigious position among the sellers in the locality. Consumers of such goods prefer to shop in the posh locality. This is also known as Veblen effect.

Pricing Strategies
5) Government Intervention & Pricing In a free, unregulated market system, market forces establish

equilibrium prices and exchange quantities. While equilibrium conditions may be efficient, it may be true that not everyone is satisfied. One of the roles of economists is to use their theories to assist in the development of policies. Control on prices are usually enacted when policymakers believe the market price is unfair to buyers or sellers. Result in government-created price ceilings and floors. Price Ceiling A legal maximum on the price at which a good can be sold. Price Floor A legal minimum on the price at which a good can be sold.

Pricing Strategies
5) Government Intervention & Pricing
Two outcomes are possible when the government

imposes a price ceiling: The price ceiling is not binding if set above the equilibrium price. The price ceiling is binding if set below the equilibrium price, leading to a shortage.

A price floor prevents supply and demand from moving toward the equilibrium price and quantity. When the market price hits the floor, it can fall no further, and the market price equals the floor price.

Figure 1 A Market with a Price Ceiling

(a) A Price Ceiling That Is Not Binding Price of Ice-Cream Cone

Supply

$4

Price ceiling

3
Equilibrium price

Demand

100
Equilibrium quantity

Quantity of Ice-Cream Cones

Figure 1 A Market with a Price Ceiling

(b) A Price Ceiling That Is Binding Price of Ice-Cream Cone Equilibrium price

Supply

$3
2 Shortage Price ceiling Demand

75 Quantity supplied

125 Quantity demanded

Quantity of Ice-Cream Cones

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