15 Pricing

PRICE PRACTICES
Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
 Some popular pricing tactics or practices exist which
are used in case the firm have objectives other than
profit maximisation.
 Methods are:
 COST-ORIENTED PRICING
 COMPETITION-ORIENTED PRICING
 PRICING BASED UPON OTHER ECONOMIC
CONSIDERATION
COST-ORIENTED PRICING
 In this approach the selling price of the product is
determined by adding a %age of profit to product cost.
 It includes the following pricing tactics:
1. Cost plus pricing or full cost pricing

2. Marginal or incremental or direct cost pricing
3. Target pricing or rate of return pricing
4. Programme pricing
Cost plus pricing or full cost pricing
Cost-plus Price of the Product

Variable Cost of Product (+) Allocated fixed cost
Full - cost
(+)
Plus or Mark-up on price or cost
Marginal or incremental or direct cost pricing
 Price is based upon the incremental cost of

production.
 Unlike the full cost pricing explains that the price is
based upon AFC+AVC
 Marginal or incremental cost pricing is based on
variable cost only.
Target Pricing or Rate of Return Pricing
 It is a redefined version of cost plus pricing.
 It is applicable when due to certain reasons, the firm has

to revise its price.
 It follow three norms:

o A fixed %age mark-up
o Profit as a fixed %age of total sales
o A fixed investment on existing investment
 Rate of return price id determined in 5 steps:
1. Specification of expected rate of return on investment

 EROR= earning / capital invested
2. Determination of full cost on the basis of normal rate of

production.
3. Estimation capital turnover ratio

 CTR= Capital invested / full cost
4. Calculation of mark up %age by multiplying CTR with EROR
5. Computation of rate of return price by adding up the full cost

and mark up
Methods are:
COMPETITION-ORIENTED PRICING
 PRICING BASED UPON OTHER ECONOMIC

CONSIDERATION
Competition-oriented pricing
 Price is determined based on the price of the product of the

competitors or the industry leader and not on the basis of the
cost of production.
 Going rate pricing (GRP): fixing the price as per the market
trend is known as going rate pricing.
 It is not necessary that the price should be same as the
competitor or the industry leader. It could be little higher or
lower.
 Loss Leader Pricing (LLP): sometimes the firms, which
manufacture or sell multiple products, charge relatively low
price on some popular product
 with the hope that the customers, who come for this product,
will also buy some other products produced and sold by the
firm. Such a product is the firm’s loss leader.
 loss leader does not sold at loss.
 It actual price charged is lower than what could have been

charged.
 The basic idea of making a popular product a loss leader is that

profit thus sacrificed will be made good by profit on the other
products. Copyright © 2004 by South-Western, a division of Thomson Learning, Inc. All rights reserved.
 Trade Association Pricing (TAP): to avoid
uncertainties of pricing decisions and the downward
pressure on price due to competition, firm agree to
maintain prices at a similar level.
 Customary Pricing System (CPS) : the prices get

fixed because they have prevailed over a long period
of time.
 Any change in cost for such products gets reflected in
quality or quantity of the product rather than its price.
 Price Leadership System (PLS): it happens in
industry there is one or many big firms whose cost of
production is low and they dominate the industry.
 Follow the price fixed by the leader.
 Cycling pricing system (CPS): pricing is based upon

an assessment of general economic environment.
 In depression, firm has reduce the price
Methods are:
 COMPETITION-ORIENTED PRICING
PRICING BASED UPON OTHER

ECONOMIC CONSIDERATION
Price based upon other economic consideration
 Administered pricing system (APS): those price which are

fixed by government,.
 Purpose to control prices of essential goods and inputs as well

as to provide weaker sections of consumers and producers.
 Dual pricing system (DPS): where administered price as well

as market price, is said to have dual prices.
 Part of the output of a firm is subjected to administered price,

while the rest of its output is sold respect the market forces
operate.
Differential pricing system (DPS)
 It is open price discrimination situation
1. Time price differentials:
 Clock-time price differentials: demand for
telephone facility and entertainment is more in night.
 Calendar-time price differentials: charges for hotel
on hill resorts differ on the basis of seasons.
2. Use-Price differentials: different use of electricity
charged differently.
3. Geographic price differential: price are charge on
the basis of location

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PRICE PRACTICES

 It includes the following pricing tactics:

1. Cost plus pricing or full cost pricing

Plus or Mark-up on price or cost

 Price is based upon the incremental cost of

 It is a redefined version of cost plus pricing.

 It is applicable when due to certain reasons, the firm has

 It follow three norms:

1. Specification of expected rate of return on investment

2. Determination of full cost on the basis of normal rate of

3. Estimation capital turnover ratio

4. Calculation of mark up %age by multiplying CTR with EROR

5. Computation of rate of return price by adding up the full cost

 PRICING BASED UPON OTHER ECONOMIC

 Price is determined based on the price of the product of the

 loss leader does not sold at loss.

 It actual price charged is lower than what could have been

 The basic idea of making a popular product a loss leader is that

 Customary Pricing System (CPS) : the prices get

 Cycling pricing system (CPS): pricing is based upon

PRICING BASED UPON OTHER

 Administered pricing system (APS): those price which are

 Purpose to control prices of essential goods and inputs as well

 Dual pricing system (DPS): where administered price as well

 Part of the output of a firm is subjected to administered price,

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