Economics - Pricing Methods

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Annamalai University
Director of Distance Education
MBA xxxxxxxxxxxxxxxxxx 1st year

Assignment Topic

1.2 Management Economics

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I declare that the assignment submitted by me is not a verbatim/photo static copy from the websites/ books/ journals/manuscripts.

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Q 4. Explain pricing methods and which method will be suitable in this present age ? Let us discuss about various pricing methods of determination of price. Introduction
No doubt that the economic theory focuses upon the determination of prices in various competitive situation but it does not discuss the methodology of price determination. Consequently, it fails to help manager to fix price for the products and services. Of course, it has been already explained that one of the factors that affect price determination process is competitive situation in the market. hence, economic theory discussion, in the context of methodology is not irrelevant. In a free market economy price do not stagnate at any one point. They always fluctuate depending upon the number of external and internal business environment. Pricing Methods - Classification

Price is the value of a products denoted in terms of money. it is the amount paid by a buyer to a seller for a unit of product or service. A firm may adopt various price policies for the product produced by it. these alternative pricing methods can be classified into two major groups as shown in the chart given below. Methods based on costs of products and methods based on market condition. Pricing Methods

1. Established Price
2. 2. Leadership price
3. 3. Penetration pricing
4. Skimming the cream policy
5. Charges what the traffic will bear
6. Psychological pricing

7. Established Price
8. 2. Leadership price
9. 3. Penetration pricing
10. Skimming the cream policy
11. Charges what the traffic will bear
12. Psychological pricing

1. Cost Plus Method
2. Incremental cost price
3. No profit No loss Price
4. Rate of Return Pricing

5. Cost Plus Method
6. Incremental cost price
7. No profit No loss Price
8. Rate of Return Pricing

Based On CostBased on Market

9. Cost Plus Method1. Established Price
1.Cost Plus Pricing Method
The most widely used method of pricing is known as cost-plus pricing. it is a procedure whereby the is determined by adding a fixed markup of some kind to the cost of acquiring or producing the product. thus development of a cost-plus price requires two basic steps : (1) determination of relevant cost and (2) determination of what the “plus” should be. The “plus” of cost-plus as a mark up or the cost or as a profit margin in the price. For example, if a product costing priced at Rs. 10, there would be a 25 percent markup on cost or a 20 percent profit margin on the price. conversation from one expression to the other is quite easy by means of the formulas : Markup on cost = Margin on Price / (1 – Margin on price)

Margin on price = Markup on cost / (1 – Markup on cost)
Determination of the relevant cost differs somewhat among the three basic types of business : manufacturing, merchandising and service. In turn, determination of the “plus” will depend, in part, on how the cost was determined. For example, your widgets cost Rs20 in raw materials and production costs, and at current sales volume (or anticipated initial sales volume), your fixed costs come to Rs30 per unit. Your total cost is Rs50 per unit. You decide that you want to operate at a 20% markup, so you add Rs10 (20% x Rs50) to the cost and come up with a price of Rs60 per unit. So long as you have your costs calculated correctly and have accurately predicted your sales volume, you will always be operating at a profit. 2.Incrimental Cost Price

Incremental cost provides...
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