Pricing Decisions Flashcards
Penetration Pricing and circumstances in which policy can be adopted
- uses low price as principal instrument for penetrating mass markets early
- it is opposite to skimming price
- why low price ? == for sake of long term survival and profitability so must be carefully considered before implementation
- so there needs to be an analysis of possible market and expansion and how to expand market
- as such there should be lot of research and forecast for determining price
- penetration pricing means penetrating mass market aqap
- may not be profitable initially, but as demand increases price is raised
- also known as stay-out-pricing -as will discourage others to enter
CIRCUMSTANCES FOR ADOPTION
- If Demand is Elastic to Price
- If Substantial savings on large scale production
- If Threat of competition
Skimming Price Strategy
It is policy were prices are kept high during the early period of product existence
Later on high promotional exp made and price reduced
Reasons for such strategy :
- Demand inelastic in earlier product unless it is established in the market
- Gradual reduction in price will tend to increase sales
- Earlier period cost high so high price will cover costs
- High capital outlays so high prodn cost. High prices will finance cost of production
How Pareto analysis is helpful in pricing in case of firm dealing with multi products
Firms dealing with multi products cannot analyse PRICE VOLUME relationship
Pareto analysis is used to analyse firms estimated sales rev from various products - which might find that 80% of total revenue is coming from 20% of products
So Management gives pricing decision making to lower management for 80% of products and concentrate on 20% of product that is essential for survival of company
Eg : Adopt sophisticated pricing method for small proportion of product
for 80% use cost based pricing method
Pareto Analysis and its applications
Analysing and focusing on 80% value relating to 20% volume
Applications
- Pricing of product (multi product company)
- Customer profitability
- Stock control
- ABC
- Quality control
Guidelines to adopt pricing policy in manufacturing organization
General guidelines
- Must encourage optimum utilization of resources
- Work towards better balance between demand n suppl
- Should promote exports
- Should provide incentive to max producn by adptin tech
- Pricing policy sould avoid advrs effct on rest of econmy
Uses of Pareto Analysis
- Prioritize problems goals objective
- Identify root causes
- Select/Define key quality improvement programs
- verify operating procedure / mfg process
- allocate physical/financial human resources
- maximize research and product dev time
Disadvantages of cost plus pricing
- Ignores demand and buyers willingness to pay
- Fails to reflect competition adequately
- Assumes CORRECT COST estimation but in multiproduct firm cost is arbitrarily allocated
- sometimes incremental cost more relevant than full cost ..this is not considered in cost plus
- FOH depends on volume - if > volume price is less and vice versa ….but sales is dependent on price so viscious cycle
What is price discrimination and under what circumstance is it possible
Price discrimination
- charging diff prices with respect to customer/product/place/time
it is possible
- if market can be segmented
- customers are not able to resell at higher price
- competitors underselling is not possible
Circumstances when it is justifiable to sell below marginal cost
Can be done for a limited period
- where materials are of perishable nature
- Large accumulation of stock and Mkt price fallen
- Reduce prices to popularize new product\
- if reduction helps sale of other products
- To capture foreign market
- To remove shut down cost
- To retain future market
Cost plus pricing and its advantages and disadvantages
- most common method is full cost to arrive at prdct price, add margin, set selling price
- during world war it was very prevelant
- in cost plus capacity utilization is important
advantages
- it is fair method and recovery of full cost is assured
- leave out scope of uncertainty
- profit % can be adjusted to take care of market compet
Disadvantages
- Covering full cost all time may ignore competition
- Price distorted unless cost allocated scientifically
- ignore marginal/incremental costing concept
- It is difficult to pre determince capacity utilization
Two pricing practices in which non cost reasons are important when setting prices
Price discrimination
Peak load pricing
