MCom I Semester Managerial Economics Methods Practice Pricing Multiple Products Study Material Notes

MCom I Semester Managerial Economics Methods Practice Pricing Multiple Products Study Material Notes:  Meaning and Definition of pricing Decision Polic Objectives of Pricing Decisions Factors Affecting Pricing Decisions Contents of Pricing Decisions Process of price Determination of a Product Implications of Ethical and Social Factors on Pricing Decisions Importance of Price Policy Meaning and Definition of Price Policy Types of Price Policies On the Basis of Price Level On the Basis of Flexibility On the basis of Specialty :

MCom I Semester Business Environment GSTP GSP Counter Trade Study Material Notes

METHODS OF PRICE-DETERMINATION IN PRACTICE AND PRICING OF MULTIPLE PRODUCTS

MEANING AND DEFINITION OF PRICING-DECISION-POLICY

Pricing-decision-policy or Pricing-decisions occupy an important place in the decisions of a business and industrial enterprise because these decisions affect the competitive position and market share of the enterprise. It affect the selling and advertisement programme also of the enterprise.

Price of a product is affected by many factors (e.g., the cost of production, the cost of advertisement, the cost of distribution, demand of the product, etc.). Price of a product should be determined only after a careful study and analysis of all these factors. The term “Price-decision’ has been defined as under:

Converse, et. al. “Decision Concerning Pricing to be followed for a period of time may be called Price Policy.”

Price Decisions are related with a certain period because these decisions have to be changed from time to time according to the changes taking place in the factors affecting these decisions. Price of a product should be determined in the manner that it may help the producer in recovering its cost and in earning reasonable amount of profit. Alongwith this, price of a product should be determined keeping in view the interests of consumers and middle-men.

Methods Practice Pricing Multiple

OBJECTIVES OF PRICING DECISIONS

Important Objectives of Pricing Decisions may be summarised as follows:

1. Proper Return on Investment. It is necessary that the price should be determined in the manner that the enterprise may get proper return on investment. It is the main object.
2. Maximum Profit through Maximum Sales. Another important object of a business enterprise is to earn maximum profit through maximum sales. This object can be satisfied only if the price of the product of the enterprise is competitive.
3. Price Stability. An important essential of Pricing– Decisions is that these decisions should promote price stability. Price of a product should not be changed again and again.
4. Stable Profit Margin. Pricing Policy of a business enterprise should be determined in the manner that the enterprise may get a certain profit margin regularly. It helps in determining Uniform Price Policy also.
5. Competition. Success of a business enterprise is determined to a grerat extent by its ability in facing the competition successfully. Therefore, Price of the product of the enterprise should be competitive. For this purpose, it is necessary that the pricing strategies of competitors should also be considered while cotermining Price Policy.
6. Price should be According to the Paying Capacity of Consumers. Every enterprise has to sell its product to its consumers. An enterprise can maximum its sales if the consumers can easily afford the price of its product. Therefore, it is necessary that the ability of consumers to pay should be duly considered while determining price of a product.
7. Long-run Welfare of the Enterprise. Pricing-Decision is one of the most important decisions of a business enterprise. It is not easy for an enterprise to change the price of its product again and again. Therefore, it is necessary that long-term objective of the enterprise should be duly considered while taking price decision.
8. Uneconomic Objectives. There are some Uneconomic Objectives also of pricing-decisions. These objectives are-(i) Social Welfare. (ii) To promote industrial stability. (iii) To increase national production and national income. (iv) Expansion of the enterprise.
   

   Methods Practice Pricing Multiple

CONTENTS OF PRICING-DECISIONS

Contents of Pricing-Decisions can be explained as under:

1. Determination of the Objective of Price Policy. The very first step of the process of Pricing-Decision is the determination of objectives, of such decisions. Marketing Manager should specifically determine the objectives which are expected to be satisfied by Pricing-Decisions. These objectives should be well defined.
2. Determination of the Factors Affecting Pricing- Decisions. Pricing-Decisions of an enterprise are affected by a large number of factors. Therefore, it becomes necessary that the Marketing Manager, should determine these factors clearly. Important factors affecting Pricing Decisions of an enterprise can be divided into two parts-(A) Internal Factors and (B) External Factors.

(A) Internal Factors. Internal Factors affecting Pricing Decisions of an enterprise are the factors which are under the control of the enterprise itself. These factors are-i) Cost of raw materials, (ii) Cost of labour, (iii) General overheads, (iv) Factory overheads, (v) Office and Administration overheads, (vi) Selling and distribution overheads, (vii) Expected Profit Margin etc.

(B) External Factors. External Factors affecting Pricing- Decisions of an enterprise are the factors which are not under the control of an enterprise. These factors should be considered more carefully while taking Pricing-Decisions. These factors are—(i) Competition, (ii) Availability of subsitute goods, (iii) Habits, tastes and preferences of consumers, (iv) Government policy, (v) Fashion and customs etc.

3. Determination of Pricing Policy and Formula. Sound-Decisions are the decisions which are based upon a pre-determined policy and formula. Therefore, Pricing-Decisions should also be based upon a pre-determined Pricing Policy and Formula. It makes it compulsory that the Marketing Manager should determine pricing and formula well in advance on which Pricing-Decisions will be based.
4. Development of Long-term Consolidated Pricing Policy. Marketing Manager should develop a consolidated long-term pricing policy so that the enterprise may achieve its pre-determined objectives.

Conclusion. Pricing-Decisions play an important role in the success of an enterprise. These decisions determine the competitive position and market share also of an enterprise. Therefore, these decisions should be taken only after considering all the short-term and long-term factors. There is a large number of factors that affect pricing decisions of an enterprise.

Methods Practice Pricing Multiple

FACTORS AFFECTING PRICING-DECISIONS

Important factors Affecting Pricing-Decisions of a product are as follows:

1. Objectives of Enterprise. Objectives of an Enterprise affect Pricing-Decisions to a great extent. Different Enterprise may have different objectives. Important objectives of Business Enterprises are—(i) To get proper return on investment, (ii) To earn maximum profit through maximum sales, (iii) Price stability, (iv) Stability of profit margin, (v) To face the competition successfully, (vi) To maintain the market share or to increase it, (vii) To determine price according to paying capacity of customers, (viii) Long-term welfare of the enterprise, etc.
2. Cost Factors. Cost Factors also affect Pricing-Decisions of a product. Cost factors include-(i) Cost of raw materials, (ii) Cost of labour, (iii) Factory overheads, (iv) Office and Administration overheads. (v) Selling and distribution overheads, (vi) Cost of Advertisement and sales promotion, (vii) Cost of storage etc.
3. Characteristics of the Product. Characteristics of the Product include (i) Nature of the product, (ii) Stage of life-cycle of the product, (iii) Availability of substitute products in the market, (iv) Possibility of the postponment of the use of product, (v) Product diversification, (vi) Durability of the product etc.
4. Price Elasticity of Demand. Price Elasticity of Demand of product plays an important role in pricing-decisions. There may be three conditions in this regard— (i) Price for the products having inelastic demand can be fixed high, (ii) Price for the products having elastic demand should be reasonable, (iii) Price for the products having more than elastic demand should be fixed low.
5. Distrinution Channel of the Product. If the distribution channel of a product is fairly large (Number of middleman is large), price of the product will be high so that every middleman may get reasonable remuneration.
6. Characteristics of Customers. Every product is meant for its customers. Therefore, characteristics of customers play an important role in pricing-decisions. Price of an industrial product should be low because industrial consumers are generally price conscious.
7. Pricing Policies of Competitors. Every Business Enterprise has to sell its product in the situation of competition. Therefore, price of the product should be determined in such a manner that it may face price competition effectively.
8. Trade Conditions. Trade conditions should also be considered while determining price of a product. For example, it has been a tradition to give a guarantee of free service for a certain period in respect of some products such as—Television, Refrigerator, Fan, Watch etc. Therefore, the cost of such service should be added while determining the price of such products.
9. Economic Environment. Economic environment also affects pricing-decisions of a product. For example, in the period of slump, price of the product should be reduced so that its demand may be maintained. During the period of boom, it becomes necessary to increase the price of a product so that the increase in costs may be recovered.
10. Other Factors. Other Factors affecting pricing decisions are-(i) Government policy, (ii) Possibility of interference by labour unions, (iii) Reaction of consumers etc.
    

    Methods Practice Pricing Multiple

IMPLICATIONS OF ETHICAL AND SOCAL FACTORS ON PRICING-DECISIONS

Following are the Implications of Ethical, Social and Legal Factors on Pricing-Decisions :

1. Fair Price. It is an important ethical and social obligation of every business and industrial enterprise that it should fix a reasonable price for its product because maximising of profit cannot be the only object of a business enterprise.
2. Fear of Labour Leaders. Some business enterprises do not increase the price of their product because of the fear of labour leaders. Therefore, business enterprise do not allow to increase the price of product unreasonable.
3. Reactions of Consumers. An important factor affecting pricing-decisions is the attitude of consumers. If an enterprice fr as the price of its product unreasonable high, consumes may boycott the duct.
4. Government Policy. Another very important factor affecting pricing-decisions of an enterprise is the Government Policy. If an enterprise fixes the price of its product unreasonabaly high, government may interfere into the affairs of the enterprise. In such case, Government may fix the price itself or it may takeover the enterprise also.

Conclusion. Though an enterprise determines the price of its product on its own but it does not mean that enterprise can fix any price for its product. There are many limitations on the freedom of an enterprise to fix price of its product. Important limitations in this respect are fear of labour leaders, reactions of consumers, possibility of Government interference etc.

Methods Practice Pricing Multiple

PROCESS OF PRICE DETERMINATION OF A PRODUCT

Price Determination of a product is a process in itself. It involves following steps:

1. To Forecast the Demand of Product. Very first step of the process of price determination is to forecast the demand of the product for which the price is to be determined. First of all, paying capacity of consumers for the product is estimated. For this purpose, the services of middlemen and experts are taken. After determining paying capacity of consumers, demand of the product is estimated at different price levels on the basis of study of price elasticity of demand.
2. To Anticipate the Reactions of Competitors. Every business enterprise has to sell its product in the market of competition. There may be two forms of competition in a market-(i) Competition from homogeneous products, (ii) Competition from subsitute products. A careful study should be made of expected competition from both types of the products.
3. To Determine Expected Share of Market. Expected Share of Market should also be determined before determining price of a product. Following are the three factors which should be considered while determining expected share of market-(1) Present production capacity of the enterprise, (ii) Possibility of expansion of production capacity and the cost of such expansion, (iii) Possibility of the entry of new firms into the market.
4. To Select a Suitable Price to Achieve Market Objectives. Every business enterprise has some marketing objectives which it wants to achieve, Achievement of marketing objectives depends to a large extent upon the selection of a suitable price policy. Therefore, the enterprise should select a price policy for its product which may be helpful in achieving its marketing objectives.
5. To Consider Marketing Policies of the Enterprise. At this stage of the process of price detemination. Important marketing policies to be considered are—advertisement policy, sales promotion policy, distribution policy and production policy etc.
6. Selection of a Specific Price. This is the last but most important stage of the process of price determination. At this stage, all the available data and information are deeply analysed and on the basis of such analysis, a specific price is determined for the product of the enterprise.
   

   Methods Practice Pricing Multiple

IMPORTANCE OF PRICE POLICY

Pricing-Decisions occupy an important place in the marketing-decisions of an enterprise. Main aim of every business enterprise is to earn maximum profit. This object can be achieved only when price of the product of the enterprise is more than its cost. Thus, Price Policy determines the success of a business enterrpise to a large extent.

Price of a product directly affects the quantity of its sales. If the price of a product is high, its sales will be less and if the price of a product is reasonable, its sales will be more. Thus, Price Policy affects the quantity of sales of the enterprise which, it turn, affects the amount of profit of the enterprise. Importnace of Pricing-Decisions can be explained as under:

1. In Case of Development of New Product. When an enterprise develops a new product, it becomes very important and critical for the enterprise to determine its price. Enterprise can choose any of the following two price policies for a new product-high enterance price policy and low enterance price policy. Price of a new product should be determined very carefully because if the enterprise selects a price policy which is not suitable for it, the product may fail in market.
2. In Case of Production on Orders. Some business enterprises produce goods only when they get order. Pricing Decisions play more important role in such business enterprise becuase such enterprises can get orders only when tender price is competitive. Therefore, it becomes necessary that the enterprise „Should determine tender price very carefully
3. In Case of Entering in New Market. When an enterprise wants to expand its marketing network, it develops new markets for its products. Pricing-Decisions play an important role in such conditions also. The enterprise may decide to sell its product in new marketing, it may decide to fix a new price for the new market. In such case, the new price should be determined only afther considering all the characteristics of new market.
4. In Case of Competitive Situation. A business enterprise can get success only when the price of its product is competitive. Therefore, it is necessary for an enterprise to fix the price of its product keeping in view the price strategy of competitors.
5. In Case of Changing Business Situation. Sometimes market situations may change. In changed market situations, all the business enterprises have to change their price policy. Therefore, a business enterprise should study the market situations carefully and take necessary steps to meet the changing market situations.

Conclusion. The success of a business enterprise depends to a large extent upon its price policy. Pricing-Decisions affect almost all the spheres of business activities.

MEANING AND DEFINITION OF PRICE POLICY

Price Policy means the Policy adopted to determine the price of a product. According the Caniff and Still, “Price Policies provide the guidelines within which pricing strategy is formulated and implemented.”

Price Policy should not be fixed. It should be changed from time to time according to the need and circumstances of the market and business enterprise.

Methods Practice Pricing Multiple

TYPES OF PRICE POLICIES

Price Policies are of various types. For the convenience of study, these policies can be divided into four parts: (i) On the basis of price level. (ii) On the basis of flexibility. (iii) On the basis of speciality. (iv) On the basis of geographical conditions.

(I)  ON THE BASIS OF PRICE LEVEL

On the basis of Price Level, Price Policies can be of the following thre types :

1. Meeting Competition Price Policy. Under this policy an enterprise termines its price policy according to the price policies of its competitors. If competitors reduce the price of their product, the enterprise also reduces the This Price Policy is very suitable for a new product, main advantage of this policy is that the enterprise faces the competition easily.
2. Below Competitors Level Price Policy. This policy is adopted by a new business enterprise which wants to introduce a new product into the market. This policy is adopt of by an existing enterprise also which wants to enter its product or products into a new market. This policy is generally adopted at the intitial stage. It helps in creating demand for the product.
3. Above Competitive Level Price Policy. Such price policy is adopted by a business enterprise which has acquired good reputation in the market and the consumers are loyal to the products of the enterprise. Such price policy is aodpted to get the benefits of such reputation.
   

   Methods Practice Pricing Multiple

(II) ON THE BASIS OF FLEXIBILITY

On the Basis of Flexibility, Price Policies can be of the following three types :

1. One Price Policy. When business enterprise fixes a single price for its product, it is called one price policy. Under this policy, the product, is sold to all the consumers at the same rate. No discrimination is made among consumers on the basis of age, sex, colour, religion, education or income etc. This price policy helps in increasing the reputation of the enterprise. It is called cultomary price policy also.
2. Flexible Price Policy. When a single product is sold to different consumers at different prices, it is called flexible price policy. Under this policy, different customers are charged different price for the same product. Such difference is made on any one or more of the following grounds—age, religion, education, income, sex, colour, bargaining power etc. This price policy is used by many business enterprises.
   

   Methods Practice Pricing Multiple

(III) ON THE BASIS OF SPECIALITY

On the Basis of Speciality, Price Policies can be of the following eight types :

1. Skimming the Cream Price Policy. This is a special type of price policy. Under this policy, price of a product is fixed very high so that the enterprise may earn maximum profit. This price policy is adopted by a business enterprise at the intial stage of its product. Because at this stage, a product has not to face any competition and the consumers do not have full knowledge of the cost of production of the product. Generally, this price policy is adopted in respect of the products of technical nature.

This price policy should be adopted very carefully and only after considering all the ‘ifs and buts’.

2. Low Penetration Price Policy. When a business enterprise determines the price of its product below the price of the products of its stores with a motive to enter into a market, it is called low penetration pricing policy. This policy is adopted only at the initial stage. This policy is adopted by a new enterprise or by an enterprise which wants to introduce a new product or by an enterprise which wants to enter into a new market.
3. Bait Pricing Policy. Bait Pricing Policy depends upon the psychology of consumers. Under this policy, two types of products are produced. Out of these, one product is low-priced and another product is high-priced. When a customer comes to buy a product, the salesman shows him low-priced product first. When customer takes some interest in this product, he shows high-priced product. Comperative merits of high-priced product are explained to the customer so that he may agree to purchase the high-priced product only. Thus, this price policy is an attempt to sell high-priced product to the customer by showing him low-priced product.
4. Price Line Policy. Under this Price Policy, different varities of a product are produced and the prices of these varities are fixed in a line. Such as a Tie manufacturer produces different varieties of Tie and determines the prices of these varieties at Rs. 50, Rs. 60, Rs. 70. Rs. 80, Rs. 90, Rs, 100 and so on. Thus, under this policy different prices are fixed for different varieties of a product. Main aim of this policy is to provide the goods to different cons’imers according to their paying capacity.
5. Full Line Pricing Policy. When a business enterprise produces different products of related nature, it fixes different prices for these products according to their demand. Prie of the products with very high demand is fixed very high. Similarly, price of some products is fixed reasonable and the price of some products is fixed very low. Main object of this price policy is to get maximum sales revenue and maximum profit. This policy is very effective in maximising the demand of products of an enterprise.
6. Unit Pricing Policy. Under this price policy, price of a product is printed on its packing. For example, the price of tooth paste, soaps, packing of consumer goods is printed on their pickings. Main object of this price policy is give the knowledge of the price of product to customers and to protect them against Cheating.
7. Psychological Pricing Policy. Under this pricing policy, prices of different products are determined in the manner that they may have a psychological impression upon customers such as Rs. 67.95, Rs. 112.95, Rs. 143.95, Rs. 195.95 etc. This price policy is adopted, for example, by Bata Shoe Company in our Country.
8. Leader Pricing Policy. This pricing policy is adopted by the business enterprises which want to establish themselves as price leaders in the market. These business enterprises fix low price for their products so that they may attract customers and win their loyalty to their products. Other business enterprises producing similar products also follow the price policy adopted by these enterprises.
   

   Methods Practice Pricing Multiple

 (IV) ON THE BASIS OF GEOGRAPHICAL CONDITIONS

On the basis of Geographical conditions, price policies can be of the following five types:

1. Uniform Delivery Pricing Policy. Under this policy, a product is sold at all the places at a uniform price. Under this policy, no difference is made in the price of a product on the basis of geographical conditions of customers. This price policy is known as postage stamps pricing policy also. It is known as F.O.B. at buyer’s location price policy. This price policy helps the enterprise in advertisement because the enterprise can announce the price of its products also in the message of advertisement.
2. Zonal Delivery Pricing Policy. Under this pricing policy, total market of a product is divided into a certain number of zones such as-Eastern Zone. Western Zone, Northern Zone, Southern Zone and Central Zone etc. Separate prices are fixed for a product for these zones. Within a zone, price of the product remains same at all places. Difference in price is made mainly due to transportation charges.
3. Production Point Pricing Policy. Under this pricing policy, the manufacturer determines a price of his product at the place of the place of buyers are born by buyer. This policy is knwon as factory pricing policy also.
4. Basing Point Pricing Policy. Under this price policy, price of the product includes its price at the place of production plus transportation expenses from the place of production to the place of buyer. Transportation expenses are charged on the basis of frieght book and added to the price of product. It is important to note in this regard that the only difference between this price policy and production point price policy is that under this policy, transportation expenses are included in the price of product while under production point price policy, these expenses are to be paid by the buyers separately.
5. Freight Absorption Pricing Policy. Under this price policy, the absorption of transportation expenses from the place of production to the place of buyers is shared by seller and buyer. A certain part of these expenses are born by seller and the remaining part is born by buyer. This policy is also adopted when the buyers are located near the place of product.

Conclusion. Main aim of every business and indsutrial enterprise is to earn maximum profit. This object can be achieved only when the enterprise adopts a suitable price policy. Price of the product of the enterprise should be competitive. It should provide a reasonable margin of profit to the enterprise. It should also provide goods and services to the consumers at most reasonable prices.

Methods Practice Pricing Multiple

METHODS OF PRICE-DETERMINATION IN PRACTICE OR METHODS OF DETERMINING PRICES

The methods of price-determination in practice are broadly divided into two parts-(1) Methods of determining prices on the basis of cost. (II) Methods of determining prices on the basis of market conditions.

(D Methods of Determining Prices on the Basis of Cost. There are following four methods of determining price of a product on the basis of cost

1. Cost Plus Pricing Method. This is the easiest and most ideal method of price determination. Under this method, cost of production is determined first. Then average total cost per unit is calculated by dividing total cost of production by the number of units produced. Then required profit is added to cost to get the price per unit. Mathematically, it can be presented as follows: Price Per Unit = Average Total Cost Per Unit + Required

Profit Per Unit. Total Cost

Total Required Profit Or =

Number of Units Produced Number of Units Amount of required profit depends upon the nature and objectives of an enterprise. It also depends upon the profit strategy of competitors. Soem enterprises fix a certain percentage of profit to determine price. For examplePrice Per Unit = Average Total Cost Per Unit + 15% of Total

Cost Per Unit This price policy is adopted when there is no competition in a market or when total cost per unit of all the competitors is equal and they want to get the profit at equal rate. If there is severe competition in a market or if the average total cost per unit of all competitors is not equal or if the rate of profit required by all competitors is not equal, this price policy is not suitable. This policy is generally adopted by public enterprises providing public utilities such as-railways, road transport, water electricity etc.

2. Marginal Cost or Incremental Cost Pricing Policy. Under this method, price of a product is determined on the bases of marginal cost or incremental cost of producing one additional unit. In other words, this method price determination considers only the variable cost per unit of product. It does not consider fixed cost or profit while determine price of a product. Thus, the price of a product under this method is equal to the variable cost per unit of product.

This method is adopted only at the initial stage of product or when a new product is to be introduced in market. This policy is adopted during the priod of depression also so that production activities may be continued. This policy cannot be adopted by an enterprise for a long time because every enterprise has recoverats fixed costs also in long-run and alongwith this, some profit is also to be earned.

3. Break-Even Point Pricing Method. Break-Even Point means the level of production at which total cost of production and total sales revenue of an enterprise are equal. At this point, there is no profit or loss to the enterprise.

Therefore, this method of price determination is called no profit loss pricing method also. Under this method, price of a production is equal to the average total cost of production. Thus, both the variable cost and fixed cost are covered under this method but it does not fetch any profit for the enterprise.

This method is based upon the assumption that fixed costs remain fixed in total and variable costs remains fixed in terms of per unit. When a business enterprise has to fix the market price, it becomes necessary that the enterprise should achieve break-even point at least (level of production of the enterprise should not be below break-even point so that if the enterprise in not in a position to earn profit, it should not suffer loss. This method is adopted only when there is tough competition in a market and even survival of an enterprise is under question. This method can also not be adopted by an enterprise in long-run because in long-run, every enterprise should make some profit.

4. Pricing Method Based on Rate of Return. Under this method, first of all a rate is determined at which an enterprise wants to earn the profit. This rate is generally based on investments. Total amount of profit to be earned by the enterprise is calculated on the basis of this rate of profit. This amount of profit is added to the cost of production and this total amount is divided by the number of units produced. Thus, price per unit is arrived at.

This method is used by the enterprises which want to earn profit at a certain rate of return on investment. This method is not very practical when there is tough competition in a market.

(II) Methods of Price Determining on the Basis of Market Conditions : There are four following methods of price determinition of a product on the basis of market conditions

1. Pricing at Market Price Level Or Going Rate Pricing. Under this method, a business enterprise follows the prices of the products of its competitors to determine the price of its product. Thus, under this method, price of a product is determined on the basis of market price.

This method is followed when there is perfect competition in a market and when there is no difference in the product of business enterprise and that of competitors. This pricing method is adopted in case of a new product also. This method is generally followed for determining the price of toffees, bidis etc., in India. This method is known as customary pricing method also.

2. Pricing Below Competitive Level. Under this method, price of a product is kept below the price of the products of competitors. This method is adopted by a new business enterprise or by the enterprise which wants to introduce a new product or by the enterprise which wants to enter into a new market.
3. Pricing Above Competitive Level. Under this method of price determination, price of product is a kept above the price of the products of competitors. This method is adopted by the enterprises which enjoy a good name and reputation in the market. This method is adopted by those business enterprises also which want to prove their product better than the products of all the competitors. For example, the price of Dalda’ Vanaspati Ghee is generally more than the prices of all other brands of Vanaspati Ghee.
4. Purchasing Power Pricing. Some business enterprises fix the price of their product on the basis of purchasing power of their customers. If the purchasing power of their customers in high, price of the product is fixed high and if the purchasing power of customers is low, price of the product is also kept low. This method is followed for cosmetics and fashions products.

Conclusion. There are several methods of price determination of a product. No method is suitable for all products and all business enterprises. Every business enterprise has to select a particular method. Price of a product should be determined in the manner that the enterprise may face competition successfully, consumers may get goods and services at most reasonable prices and the enterprise may get maximum but reasonable profit.

PRICING STRATEGIES FOR DETERMINING THE PRICE OF A NEW PRODUCT

Pricing Strategy means a policy to face a specific situation while pricing policy means a policy of determining price for a product. Pricing Strategy is of temporary nature while pricing policy is of permanent nature.

It is a serious problem in itself to determine the price of a new product because in case of a new product, it is very difficult to forecast the market demand of the product. In this situation there are two alternatives before a marketing manager in respect of pricing strategy-(I) High Initial Pricing Strategy Or Skimming the Creat Strategy, (II) Low Penetration Price Strategy.

Methods Practice Pricing Multiple

 (1) HIGH INITIAL PRICING STRATEGY OR SKIMMING THE CREAM STRATEGY

Under this Pricing Strategy, price of a new product is fixed high at the initial stage. Gradually this price is reduced when competition starts in the market. This pricing strategy is based upon the logic that at the initial stage of a product, there is no competition in the market and at this stage, price of the product may be fixed high. Another logic for this price strategy is that the enterprise has to incurr heavy expenditure on research, advertisement and sales promotion programme of a new product and to recover this expenditure, it is necessary that the price of product should be kept high.

There are some important causes for the adoption of this Pricing Strategy for a new product. These causes are (1) Heavy expenditure on reasearch advertisement and sales promotion programme of a new product, (ii) Absence of competition at the initial stage of a product, (iii) Demand of a new product is relatively less elastic, (iv) This strategy is very suitable for luxurious products, (V) This strategy helps in the earlist recovery of initial investment, (vi) This strategy allows reduction in price in future. (vii) This strategy is successful in attracting the consumers of high income group, (viii) This strategy is helpful in establishing equilibrium between demand and supply of a product, (ix) This strategy is helpful in earning high rate of profit at the initial stage.

Methods Practice Pricing Multiple

(II) LOW PENETRATION PRICE STRATEGY

This Strategy is just opposite to skimming the cream strategy. Under this Strategy, price of a product is fixed low at the initial stage and gradually, when the product gets popularity in the market, its price is increased. This pricing strategy is based upon the logic that a new product can enter into the market easily, if its price is kept low. This strategy is adopted by a new enterprise or by an enterprise introducing a new product into the market or by an enterprise which wants to expand its market. This price policy is very suitable when there is to tough competition in the market.

There are some important causes for adopting this Price Strategy. These causes are-(i) Less expenditure on research, advertisement and sales promotion programme of a new product. (ii) Less cost of production of a new product. (iii) To get the economies of large scale production. (iv) To enter into the market. (v) To expand the market. (vi) This strategy is very suitable when the demand of a new product is relatively elastic. (vii) This Strategy is helpful in attracting consumers. (ix) This Strategy is helpful in discouraging competition. (viii) This Strategy is helpful in attracting consumers. (ix) This stragegy is helpful in discourageing Government intervention. (x) This strategy is helpful in earning maximum profit through maximum sales.

Conclusion. There are two Pricing Strategies for determining the price of a new product. High initial price strategy or skimming the cream strategy, and low penetration price strategy. Both the strategies have their own merits and demerits. Both the strategies are helpful in some particular circumstances. No individual strategy is suitable for all the enterprises, for all the products and in all the circumstances.

Methods Practice Pricing Multiple

MULTIPLE PRODUCTS

The traditional theory of price determination is based on the assumption that the firm produces a single homogeneous product. But firms usually produce more than one product. When firms produce several products, managers must consider the inter-relationships between those products. Such products may be joint products or multi-products. Joint products are those where inputs are common in productive process. Multi-products are creation of the product line activity with independent inputs but common overhead expenses. Pricing of multi-product or joint product requires little extra caution and care.

For evolving price policy for multi-product firm, certain basic consideration involved in decisions-making are:

(i) price and cost relationship in product line, (ii) demand relationship in product line, and (iii) competitive differences. They are explained as follows:

(1) Price and Cost Relationship. For evolving a price policy for any product, price and cost relationship is the basic consideration. Cost conditions determine the price. In this context a set of alternative price policies should be considered, for example

(i) Pricing of multi-products may be proportional to incremental cost.

(ii) Prices for multi-products may be fixed as per the product life-cycle of each product.

(2) Demand Relationship for Multi-product. Different demand elasticity of different consumers may allow the firm to follow polices of price discrimination in different market segments.

(3) Competitive Differences. For making price decisions the assessment of degree of competitiveness is required.

Methods Practice Pricing Multiple

MARGINAL TECHNIQUE FOR PRICING MULTI-PRODUCTS

Marginal technique for pricing multi-products is based on the logic that when the firm has spare capacity, unutilised technical resources, etc., the firm enters into production of various other products with most profitable uses of alternatives.

A firm shall produce the multi-product to the level where MR from sales of all these products equals the MC. If MC is more than MR then the firm shall stop producing and selling one of the products which offer less MR than MC.

PRICING OF MULTIPLE PRODUCTS OR JOINT PRODUCTS

Products can be related in production as well as demand. One type of production interdependency exists when goods are jointly produced in fixed proportions. The process of producing mutton and hides in a slaughter house is a good example of fixed proportion in production.

Pricing of joint products can be explained under two different circumstances i) When there is fixed proportion of products, and (ii) When there is variable proportion of products. For example, we are taking first case in the following lines

Methods Practice Pricing Multiple

JOINT PRODUCTS WITH FIXED PROPORTION

In this situation, there is a single marginal cost curve for both products, for example. This reflects the fixed proportion of production, i.e., the marginal cost is the cost of supplying one more unit of the product package. Where goods are jointly produced as in the case of mutton and hides, pricing-decision should take this interdependency into account.

MC figure carries the assumption that PM each product is produced in fixed proportion MRM and MRy are the marginal revenue curves for mutton and hides respectively. But when and additional animal is processed at a slaughter house both mutton and hide become available for sale. Hence the marginal Quantity per revenue associated with sale of a period unit of the product package is the sum of the marginal revenues. This sum is represented by the line MR. MRT is determined by adding MRM and MR, for each rate of output. Graphically, it is the vertical sum of the marginal revenue curves of the two products. The profit maximising output Qo is determined by the intersection of MRT and MC curve at point E with price of mutton OPM and of hides OP.

TRANSFER PRICING

Transfer pricing is one of the most complex problems in pricing. The growth of large scale multi-divisional organisations have given rise to the problem of pricing commodities that are transferred internally from one division to another. The divisional organisations are preferred due to the following reasons :

(i) It provides a systematic way of delegation and decision-making,

(ii) for proper evaluation of contribution, and

(iii) for the precise evaluation of manager’s performance.

This involves the problem of sub-optimisation. The transfer price must satisfy the following two criteria

(1) I should help to establish the profitability of each division or department

(ii) It should permit and encourage maximisation of the profits of the company as a whole.

For determining the transfer price there are three alternative methods. They are explained as follows:

(i) Market Price Basis. The suitable system of transfer of goods from one division to another under the same management to another company, is the market price basis. The market price should be the transfer price. Wherever a market price exists for a product, the inter-divisional transfer price should equr’ ve market price to avoid sub-optimization. This method definitely avoids the possibility of passing the inefficiencies of one department to the other departments.

(ii) Cost Basis. In case the product produced by a division of the firm can be sold only to another division of the firm, the inter-divisional transfer should be priced at the level of the actual cost of production. Here transfer prices will be useful to achieve the best joint level of output. It will maximise profits.

(iii) Cost Plus Basis. Under this method the goods and services of each department are charged on the basis of actual cost plus a margin by way of profit. The major defect of this method is that the transferring department may add a high margin so as to raise the profit of the department. It may result in setting the ultimate price unduly high thereby affecting sales.

Methods Practice Pricing Multiple