Economics Ppt FINAL
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Transcript of Economics Ppt FINAL
PRICING PRACTICES
• Introduction to pricing practices- PRANITHA.G• Cost plus pricing – RIKSHITA JAIN• Marginal or Direct pricing- KIRANDEEP
KAUR• Rate of return & Programme pricing-
PRANITHA.G• Going rate pricing & Loss leaders - ASMA• Trade association & customary pricing -SONAM• Price leadership – PURVA SANGHI• Cyclical pricing- KARISHMA AGARWAL
PRICE ,PRICING & PRICING PRACTICES.
•PRICE: The amount of money expected, required, or given in payment for something.
•PRICING: is the process of determining what a company will receive in exchange for its products.
•PRICING PRACTICES
COST PLUS PRICING
• Price is determined by adding a fixed mark up to the cost of acquiring or producing a product.
cost Mark up Price
CALCULATION OF A COST -PLUS PRICE
Determination of a relevant full cost
Determination of what ‘plus’ the firm adopts.
FORMULA
P = AVC + ATC + PM
P = Price
AVC= Average variable cost
ATC= Average total cost
PM=profit margin
AVC+ATC= FULL COST.
ADVANTAGES:• Simple• Justifiable• Fulfills the objective of profit maximization.• In practice, firms are uncertain about the demand conditions,
so moving away from cost plus may be too risky.
DISADVANTAGES:• Ignores demand.• Ignores competition.• Ignores opportunity cost.• Arbitrary cost allocation.• Ignores price elasticity.
MARGINAL-COST PRICING
The practice of setting the price of a product to equal the extra cost of producing an extra unit of output
This situation usually arises in one of two circumstances:• A company has a small amount of remaining unused production capacity available that it wishes to use; or• A company is unable to sell at a higher price
Advantages of Marginal Cost Pricing• Adds profits• Market entrance• Accessory sales
Disadvantages of Marginal Cost Pricing• Long-term pricing• Ignores market prices. • Customer loss
TARGET OR RATE OF RETURN PRICING
•Revised version of cost plus pricing
•Takes into consideration the demand factors
•They should ensure to maintain either:
1. Fixed percentage markup over cost
2. Profit as a fixed percentage of total sales or
3. Fixed return on existing investment
• METHOD
Example :
• Assume a firm invests $100 million in order to produce and market designer
snowflakes and they estimate that with demand for designer snowflakes
being what it is, they can sell 2 million flakes per year. Further, from
preliminary production data they know that at that level of output their
average total cost (ATC) is $50 per flake. Total annual costs would be $100
million (2 million units at $50 each). Next, management decides they want a
20% return on investment (ROI). That works out to be $20 million (20% of a
$100 million investment). Profit margin will need to be $10 dollars per flake
($20 million return over 2 million units). So the price must be set at $60 per
designer flake ($50 costs plus $10 profit margin)
Advantages :
• Easy and convenient for a firm to adopt
• Fulfills the objective of profit maximization
• Reduces the cost for decision making
• in ROR pricing full cost is based on normal output and cost
• in ROR pricing mark up is based on expected or planned rate
of return on investment.
Programme pricing:
• In this the price is related to supply price. In order to
cover the own cost and profit margin, a mark up is put
over the supply price. This supply price may be the
wholesale price or that of goods at the go-down.
• This is quite popular in wholesale and retail trade.
GOING RATE PRICING• Setting a price for a product or service
• Prevailing market price as a basis.
• Homogeneous products
• Example - aluminum or steel.
Going rate pricing is most likely to occur where:
• There is a degree of price leadership taking place within a particular market
• Businesses are reluctant to set significantly different prices because of the risk of
setting off a price war, which would reduce profits to all firms
• There is a degree of collusion taking
• Place between firms
LOSS LEADER PRICINGCharacteristics of loss leaders
• A loss leader may be placed in an inconvenient part of the store, so that purchasers
must walk past other goods which have higher profit margins.
• A loss leader is usually a product that customers purchase frequently—thus they are
aware that its unusually low price is a bargain.
• Loss leaders are often scarce, to discourage stockpiling. The seller must use this
technique regularly if he expects his customers to come back.
• The retailer will often limit how much a customer can purchase.
• Some loss leader items are perishable and cannot be stockpiled.
TRADE ASSOCIATION PRICING:
To avoid uncertainties of pricing decisions and the downward pressure on prices
which competition exerts, firms frequently come to express or implied agreements to
maintain prices at similar level.
Individual firms may find it worthwhile to break out of any agreements , but this may
lead to the following possible alternatives:
1) The price cut may spark off a price war
2) If the firm breaking out of the collusion is able to keep its rival in the dark about
the price-cut.
WHAT IS CUSTOMARY PRICING?
A method of determining the price for a good or service based on the
perceived expectations of customers. Customary pricing is generally used
for products with a relatively long market history of being sold for a particular amount,
and is driven by intuitive notions of value on the part of buyers. EX: coffee,Chocolates
PROBLEMS OF CUSTOMARY PRICING:
• The market grows accustomed to paying a certain amount for a type of product
• Increasing the price beyond this amount will cause sales to drop dramatically
PRICE LEADERSHIP
“Situation in which a market leader sets the price of a product or
service, and competitors feel compelled to match that price.”
• Price leader
• Largest firm
• Difference in their prices
• Positive
• Undisputed market leaders
• Inefficient firm
• Reasons
TACTICS:
• Price changes(infrequent)
• Communications
• Limit pricing
• Price wars
FORMS OF PRICE LEADERSHIP MODEL:• Barometric price leadership
• Price leadership by the dominant firm
• Price leadership by a low cost firm
• Exploitative or aggressive price leadership
CYCLICAL PRICING
It refers to the pricing by a firm depending on
an assessment of general economic
environment i.e. recession or depression.
CYCLICAL PRICING POLICIES
• Price rigidity• Cost changes• Fluctuations due to substitutes• Market share• Demand fluctuations• General price index