class 1, nov 16 - price determination

8/3/2019 Class 1, Nov 16 - Price Determination

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Comprehensive assignment to include

contents of MM1

To be submitted in soft copy (File Name: --(Roll No)Ch (Chapter No)Nov (Date)

First by Nov 23

Quizzes & CT unannounced

No right to be late or absent

GR & Evaluation

2


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Price Determination

1

Bring your mind to full zero and ask thequestion how do we determine the price?


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The Three Cs of Pricing

Competition

CustomersCosts


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Meaning of price

Significance of price

Concept of price and value relationship Pricing objectives

Factors influencing price

Costs of producing and marketing a product Approaches to determining price

Break-even analysis

Lesson Overview

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Meaning of Price

PRICE

Amount of money and/or

other items with utilityneeded to acquire

a productTuition

Interest Rent

Fare

Wage

SalaryDues

Commission

Utility; Barter - Net4Barter 3


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Importance of Price

4

EconomyAffects Wages,

Rent, Interest &

Profits Firm

Demand determinant;

Only P giving revenue

Customer

Quality; Price/Non-price sensitive; Value component;


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Value

Product has ample value when

a. Price is Low? b. Price is High ? 5

Value = Benefits - Costs


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Pricing Objectives

Pricing

Objectives

Profit-oriented

Sales-oriented

Status Quo

Target return

Maximize

profits

Sales growth

Growth in

market share

Meeting

Competition

Non-price

Competition 6


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Pricing Objectives: Profit-Oriented

Achieve aTarget

Return

MaximizeProfits

7Retailers, Voltas, Motorola, Ciba Giegy, GE; Calculators


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Pricing Objectives: Sales-Oriented

Increase

SalesVolume

Maintain

or

Increase

Market

Share

8Automobile discounts, Seasonal discounts, Off-season discounts, etc; Japanese, Samsung, AIWA etc, Coca-Cola etc

Why higher market shareis important?


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Pricing Objectives: Status Quo

MeetCompetition

Stabilize

Prices

9Standard products - Steel, Chemicals, Wheat etc


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Factors Influencing Price

Estimated Demand

Competitive Reactions

Expected price

Demand curve

Price elasticity

Similar products

Unrelated products

Substitutes

10Base (List) price; Mochi/Power Agarwal Packers & Railway Freight Cinema Ticket vs Dinner at Dolari Dhani


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Estimated Demand

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Price and Marketing-Mix

Price

Promotion

Product

Distribution

Channels

12New/Established/Life Cycle stage/Trade-in/Returned for exchange/Leasing;


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Cost of a Product

Base price is also affected by its cost. Unit cost ismade of several types of costs. Cost conceptsfundamental to pricing are:

1. Fixed cost (rent, executive salaries, property tax,

etc) - remain constant regardless of how manyitems are produced. Difficult to change in the shortrun (but not in the long run). 1a. Total fixed cost - sum of all fixed costs.

1b. Average fixed cost - Total fixed cost divided by the

number of units produced.2. Variable cost, Costs such as labor or materials, etc

that is directly related to production.

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Cost of a ProductContd

2a - Total variable costis sum of all variable costs.More units produced, higher is this cost.

2b - Average variable cost - the total variable costdivided by the number of units produced.

3. Total cost - sum of total fixed cost and totalvariable cost for a specific quantity produced.

4. Average total cost - total cost divided by numberof units produced.

5. Marginal cost - cost of producing and sellingone more unit. Usually the marginal cost of the last unit is the same

as that unit's variable cost.

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Cost of a ProductContd

6. The average fixed cost curve declines as outputincreases due to spreading fixed costs over anincreasing number of units.

7. The average variable cost curve is U-shaped.

Starts high because variable costs are higher when onlya few units are produced.

Economies of scale cause per-unit costs to drop.

Diseconomies reoccur as production increases atextreme.

8. The average total cost curve is the sum ofaverage fixed cost and average variable cost.

9. The marginal cost curve depicts the cost of eachadditional unit; intersects average cost curve at its

lowest point. 15


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Unit Cost Curves of a Firm

Quantity

Price

Note how unit costs change as quantity increases. Using cost-

plus pricing, two units of output would be priced at Rs 184 each,

whereas four units would sell for Rs 120 each. 16


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Setting Base Price

Most companies set the base prices based on:

1. Total cost plus desired profit, and/or,

2. Marginal analysisa consideration of both

demand and supply, and/or,

3. Competitive market conditions.

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Cost-Plus Pricing

Setting the price of one unit

ofa product equal

to the totalcost of the unitplus the desired profit on the unit

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Babu Rao & Co: Cost-Plus Pricing

Babu Rao & Cos Costs, Selling

price, and Profit

No. of Flats built and sold by Babu

Rao & Co and finances (in Rupees)

Planned = 100 Actual = 80

Labor and material costs

(20,00,000 per Flat)

200,000,000 160,000,000

Overhead (fixed) costs 5,000,000 5,000,000

Total cost 205,000,000 165,000,000

Total sales at 22,55,000 per Flat 225,500,000 180,400,000

Profit: Total 20,500,000 15,400,000

Per Flat 2,05,000 1,92,500

As percent cost 10% 9.33%

Actual results often differ from planned outcomes because

various types of costs react differently to changes in output

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Cost Plus Pricing Another Example

For making 10,000 shirts, following needs to beinvested:

Fixed Cost Rs 1,50,000/- (Machines, Rent, etc)

Variable cost per shirt (Cloth, Collars, Buttons,

zippers etc) - Rs 30/- per shirt.

Cost per shirt is 45/-

You expect 30% return.

So price per shirt will be Rs 45/(1-0.3) = Rs64.28

Note the difference in calculating the return.

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Cost Plus Pricing - Limitations

Assumes all output will be produced and sold.

Market demand is ignored.

Does not recognize that total unit costs change as

output expands or contracts.

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Cost Plus Pricing - Limitations

However, Cost-plus methods can be refined to

address limitations.

Prices based on marginal costs only.

May be employed to maintain production and

labor during slack periods.

May be used if one product attracts business foranother.

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Pricing by middlemen

Wide use of cost-plus pricing.

Different retailer require different % markups due

to the nature of products/services handled.

Low-turnover products have higher mark-ups than high-

turnover products.

Extent of services offered affects mark-up.

Evidence for market-influenced pricing middlemen.

Most retail prices are really just offers to be accepted or

rejected. Many retailers do not use the same markup on all

products carried.

A middleman doesnt set base prices; it only adds

percentage to producers prices.23


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Markup Pricing by Retailers & Wholesalers

Cost to

Consumer

= Rs 150

Consumer

Cost and

Profit = 100%,

Or Rs 72

Manufactur-

ers selling

price is =

100%Or Rs 72

Manufacturer

Cost = 80%,

Or Rs 72

Markup =20%, Or

Rs 18 Wholesalers

Selling

price

= 100%

Or Rs 90

Wholesaler

Cost = 60%,

Or Rs 90

Markup =

40%, Or

Rs 60

Retailers

Selling

price

= 100%

Or Rs150

Retailer

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Evaluation of cost-plus pricing

It is used by many industrial firms.

Costs should be only one of the factors considered

in pricing.

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Break-Even Analysis

BREAK-EVEN POINT

The quantity of output

at which total revenue equals totalcosts,

assuming acertain selling price

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Sample Break-Even Chart

Profits

Losses Total Fixed Cost

BEP

Quantity in units

0 100 200 300 400 500 600 700 800 900 1000 1100 1200

Cost,

Revenue,

Profi

t

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000100,000

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Break-even analysis

Break-even point is the total fixed costs divided byunit contribution to overhead.

Unit contribution to overhead is the selling price

minus the average variable cost.

Two basic assumptions

Total fixed costs are constant.

Variable costs are constant per unit of output.

Ignores market demand at various prices. Can be useful in spite of limitations.

How??

Recollect Vora & Co28


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Prices based on Marginal Analysis

Profit

Maximizationpricing based on

Demand &

Costs

Might

Provoke

Price War

Apply to

Babu Rao & Co

& Shirts Co 29


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Base Price Determination Continuum

Cost-plus

Pricing

Cost & Market

based Pricing

Market-based

Pricing

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Market Based Pricing

Pricing Below

Competition

Pricing Above

Competition

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Pricing to Meet

Competition

How HP would price its LP?

How would Nirma/Ajanta price products?

How would L&T price breakers?


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Key Terms and ConceptsKey Terms and Concepts Price

Barter

Value

Pricing objectives Base price (list price)

Expected price

Inverse demand

Fixed cost

Total fixed cost

Average fixed cost

Variable cost

Total variable cost

Average variable cost

Total cost

Average total cost

Marginal cost

Average fixed cost curve

Average variable cost curve

Average total cost curve

Marginal cost curve

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Key Terms and ConceptsKey Terms and Concepts Cost-plus pricing

Break-even analysis

Break-even point

Marginal revenue

Average revenue

Pricing to meet competition

Perfect competition

Dynamic pricing

Kinked demand

Oligopoly

Pricing below competition

Pricing above competition

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MM2 Comprehensive Project

Each of you select a company on which you willdo the project.

Submit the list of companies selected by each of

you by 5th October, 1.00 PM

Think as if you are the marketing head of thatcompany.

Correlate the concepts learnt from day one

Submit the 1st

report covering up to lesson 11 onOct 20, 4.00 P.M.

Submit additions every 2-weeks (by Monday 4.00

P.M. of the following week) depending on what

developments take place in the class. 34


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What in Comprehensive Project?

Submit 1st

report on Oct 24, 4.00 P.M. Look at the company and its business.

Ch 2- Marketing Environment

Ch 4 - Consumer markets and buying behavior

Ch 5 - Business markets and buying behavior Ch 6 STP

Ch 7 Marketing Research

Ch 8 Product Planning and development

Ch 9 Product Mix strategies

Ch 10 Brands, Packaging and other product features

Ch 11 Services Marketing

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class 1, nov 16 - price determination

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