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By
Dr. Kalyani Rangarajan
PESIT, Bangalore
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= The use of break-even analysis and learning curves
to determine the effect of price on cost, volume, and
profit.
= The value and application of ROI pricing
= The use of expected payoff analysis when initiating
or responding to price changes.
= The development of strategic models for competitive
bidding
= The factors determining a firm¶s negotiating position
= The role of leasing in pricing strategy
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= Balance the effect of price on short-term
profits versus long-term volume and
subsequent cost reductions
= Prior to introduction of a new product, when
initiating a price change, and when
responding to competitors¶ actions
= Profitability (break-even) analysis is
important.
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= Knowledge of fixed and variable costs
= Forecast future costs based on learning curve
= Ñ
    

where Y = Profits, X = No of units, P = price/unit, V = Variable cost /

unit, F = Total fixed cost

= t BEP, | !
X = F/ P ± V where P ± V = Contribution margin

Marginal cost and revenues:  firm should continue striving for

increased volume as long as marginal revenue exceeds marginal
costs.
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ROI = Profit / investment
= (Profit/sales) x (sales/investment) =
Profit margin x investment turnover

Common method used in oligopolistic markets.

In a large industrial firm, there are multiple
profit centers, each with their own ROI goals.
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The concept:
If a product is manufactured and sold on a
continuous basis, unit costs will decline, as
cumulative quantity increases. The unit costs
will decline more rapidly if the rate of
production is greater.
The learning curve shifts to the economies of
scale curve downwards with the
accumulation of quantity.
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= Requires careful gathering of relevant
information on the possible outcomes that
might result from a price change and forces
knowledgeable executives to assign
subjective profitabilities to these outcomes.
= Prior to initiating price changes, reactions of
buyers, competitors, and govt must be
carefully weighed.
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= In industrial market, significant volume of purchasing
is done through competitive bidding rather than
price list
= Closed or open
= Developing bids is costly and time consuming, and
profitability depends on firm¶s technical expertise

Prebid analysis
= Company objectives
= Screening bid objectives
= Bid determined to optimize profit
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= åsed in complex buying situations
= Requires skills, experience, and preparation
on the sellers¶ part
= Negotiating strategies: Negotiated, dictatorial,
defensive, and gamesmanship strategies
= Measuring buyer and seller strength
= Evaluating buyer and seller product need
= Determining key negotiable factors
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= lternative to selling capital equipment
= Minimizes equipment disposal problems, avoids dilution of
ownership or control
= Provides 100% deductibility of costs, allows for piecemeal
financing of large acquisitions, after-tax cost less than that of
equity, allows pass through of investment tax credit to companies
with low or heavily sheltered earnings and lease payment
provides a greater tax shield than depreciation or interest
payments.

Leasing arrangements:
Types: Financial and operating or services leases
  


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1. Leasing provides 100% deductibility of costs

2. Leasing does not dilute ownership or control
3. Leasing allows for pieceneal financing of large
acquisitions
4. The after-tax cost of leasing is less than the after-tax
cost of equity
5. Leasing allows for the pass-through of investment tax
credit to companies with low or heavily sheltered
earnings
6. Lease payments provide a greater tax shield than
depreciation or interest payments