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PRICING TECHNIQUES

INTRODUCTION
PRICING TECHNIQUE: In product pricing you have to make a decision what kind of a pricing strategy are you going for. The strategy of choice depends quite a lot on your product itself and its competitors. Pricing strategies for products or services is mainly done to improve profits.

The different Pricing techniques are: Cost Based Pricing Demand Based Pricing Competition Based Pricing Multiple Product Pricing Peak-Load Pricing Transfer Pricing

Cost-plus(mark-up) pricing
It consists of determining the cost of their product and then adding a percentage on top of that price to determine the selling price to the customer. Price= AVC+ AFC+ m m is the profit margin

Based on price elasticity, mark-up pricing is P=AC(Pe/Pe+1) Merits: Easy to use Simplest method of pricing Widely used method Demerits: It does not take into account demand conditions and competition factors. It fixes a price based on past production cost for all its future production

COMPETITION BASED PRICING


Competition based pricing techniques involves setting of prices based on what rivals are charging. Under this method the company tries to keep its prices at par with its competitors prices. PROBLEMS OF COMPETITION BASED PRICING: Copying market prices by neglecting cost of production and distribution often leads to decrease in profits, may even lead to losses.

If the products are at a discounted price of using a loss leader is that customers may take the opportunity to bulk-buy.

SOLUTIONS TO COMPETITIVE PRICING TECHNIQUE: The most common ways businesses raise profits are by increasing sales, decreasing cost of production, and lowering overhead. The goal of your business should be to maximize revenue and profits, even if it does take a little bit of extra work on the pricing front.

Short-term pricing tactic for any one product. Competitive pricing for discounted clearance sale and psychological pricing.

Customer Based Pricing techniques

Customer based pricing


Penetration pricing
Loss leaders

Price skimming
Predatory pricing Psychological pricing

Price Skimming Strategy


Definition: Setting a relatively high price during the initial stage of a products life. Good examples of price skimming include innovative electronic products, such as the Apple I pad and sony playstation. Objectives To serve customers who are not price conscious while the market is at the upper end of the demand curve and competition has not yet entered the market. (b) To recover a significant portion of promotional and research and development costs through a high margin.

Price Skimming Strategy


Requirements: : Use of marketing mix variables, especially design and communication efforts. Heavy promotional expenditure to introduce product, educate consumers, and induce early buying. Relatively inelastic demand at the upper end of the demand curve. Lack of direct competition and substitutes. Expected Results: (a) Market segmented by price-conscious and not so price conscious customers. (b) High margin on sales that will cover promotion and research and development costs. Opportunity for the firm to lower its price and sell to the mass market before competition enters.

Price Penetration Strategy


Definition: Setting a relatively low price during the initial stages of a products life. Objectives: To discourage competition from entering the market by quickly taking a large market share and by gaining a cost advantage through realizing economies of scale Requirements: : Use of marketing mix variables, especially design and communication efforts. Product must appeal to a market large enough to support the cost advantage. Demand must be highly elastic in order for the firm to guard its cost advantage Expected Results: High sales volume and large market share. Low margin on sales. Lower unit costs relative to competition due to economies of scale.

PEAK-LOAD PRICING
Peak load pricing is the practice of pricing products/services whose demand varies according to the time of the day. Example electricity, telephone and transport services. The problems in Pricing: firms producing non-storable goods and services with high seasonal and day-night variations in demand often face the problem of how to price the product. If a peak-load price is charged uniformly in all seasons, it will be unfair because consumers will be charged for what they do not consume. if a uniform off-load price is charged, production will fall and there will be acute shortage of electricity during peak hours .
Alternatively if the averages of the two prices say is charged, it will have the demerits of both peak load and off load prices.

SOLUTION TO ABOVE PROBLEM: A higher price called peak load price is charged for the peak load period
and a lower price charged for the off-peak period.

Advantages:
It results in an efficient distribution of the electricity consumption, housewives run their dishwashers and washing machines during the offpeak period. It helps in preventing loss to the electricity company and ensures regular supply of electricity in the long run.

Disadvantages:
The business which are by nature day-business pay higher rate than those which can be shifted to off-peak period. Billing system is a greatest problem, each consumer will have to install two meters, one for peak load and another for the off-load period.

TRANSFER PRICING
The amount charged when one division sells goods or services to another division is called transfer price. Transfer pricing is a profit allocation method used to attribute a corporation's net profit or loss before tax to tax jurisdictions. Transfer prices are the charges made between controlled (or related) legal entities i.e. within the same group.

Objectives of Transfer Pricing


1. Goal congruence: The prices should be set so that the divisional management desire to maximize divisional earnings is consistent with the objectives of the company as a whole 2. Performance appraisal: The prices should enable reliable assessments to be made of divisional performance. 3. Divisional autonomy: The prices should seek to maintain the maximum divisional autonomy so that the benefits of decentralization are maintained.

Fundamental Principle
The fundamental principle is that the transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchase from outside vendors.

Benefits of Transfer Pricing


1. Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries Facilitating dividend repatriation when dividend repatriation is curtailed by government policy by inflating prices of goods transferred

2.

3.

Challenges of Transfer Pricing


Internal and external problems for the multinational corporation
Performance Measurement
The clouding effect of manipulating intra corporate prices on a subsidiarys apparent and actual profit performance Difficulty in maintaining relationships with subsidiaries that are negatively impacted by transfer pricing.

Taxation
Tax and regulatory jurisdictions contribute to and compound transfer pricing problems. Pricing that is justified and reasonable in the home country may not be perceived as such in the host country.

TRANSFER PRICING
The amount charged when one division sells goods or services to another division is called transfer price. Transfer pricing is a profit allocation method used to attribute a corporation's net profit or loss before tax to tax jurisdictions. Transfer prices are the charges made between controlled (or related) legal entities i.e. within the same group.

Objectives of Transfer Pricing


1. Goal congruence: The prices should be set so that the divisional management desire to maximize divisional earnings is consistent with the objectives of the company as a whole 2. Performance appraisal: The prices should enable reliable assessments to be made of divisional performance. 3. Divisional autonomy: The prices should seek to maintain the maximum divisional autonomy so that the benefits of decentralization are maintained.

Fundamental Principle
The fundamental principle is that the transfer price should be similar to the price that would be charged if the product were sold to outside customers or purchase from outside vendors.

Benefits of Transfer Pricing


1. Lowering duty costs by shipping goods into high-tariff countries at minimal transfer prices so that duty base and duty are low Reducing income taxes in high-tax countries by overpricing goods transferred to units in such countries; profits are eliminated and shifted to low-tax countries Facilitating dividend repatriation when dividend repatriation is curtailed by government policy by inflating prices of goods transferred

2.

3.

Challenges of Transfer Pricing


Internal and external problems for the multinational corporation
Performance Measurement
The clouding effect of manipulating intra corporate prices on a subsidiarys apparent and actual profit performance Difficulty in maintaining relationships with subsidiaries that are negatively impacted by transfer pricing.

Taxation
Tax and regulatory jurisdictions contribute to and compound transfer pricing problems. Pricing that is justified and reasonable in the home country may not be perceived as such in the host country.

WHAT IS MULTIPLE PRODUCT PRICING?


All the firms have more than one product in their line of production. Each model or size of the product may be considered a different product e.g. the various models of television, refrigerators, cars etc. produced by the same company may be treated as different products for pricing purpose. The various models are so differentiated that consumers view them as different products Each model or product has different average revenue (AR) and Marginal Revenue curves. Each product has a separate demand curve & one inseparable marginal cost curve.

Products with Interrelated Demands

For a two-product (A and B) firm, the marginal revenue functions of the firm are:

TRA TRB MRA Q A Q A


Eg : Philips

TRB TRA MRB QB QB