pricing techniques for profit maximization
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Its is very helpful for Managers, Employers and Business Decision MakersTRANSCRIPT
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BY SKILLS DEVELOPERS
Pricing Techniques for Profit Maximization
Skills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org
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What is Price
The amount of money charged for a product and services is called Price
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Objective of Pricing
Profit Maximization
High Market Share by attracting and retaining customers
To attain Status Quo by Stable Price
Meeting Competition in Market
High Return on InvestmentSkills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org
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Fact0rs you will consider before Pricing
How should I price my product?Market Size.Customer Price Sensitivity.Estimated sales at different price levels.How much market share will effect if change appear?Product Costs.Current and potential competitive reactions.Nonprice factors, such as features and performance.
(Quality, uniqueness, availability, convenience, service, and warranty)
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Marketing Management
Marketing management is about placing the
right product, at the right price, at the right
place, at the right time.
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Price Determination Methods
Cost Base Pricing
Break Even Concept
Demand Base Pricing
Pricing as per Competition
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What is Cost
What you pay in monetary terms to get or achieve a objective is called its Cost.
Material Cost.Labour Cost.FOH Cost.Selling CostAdministrative Cost.Financial Cost.
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KINDS OF COSTS
Variable Cost
Fixed Cost
Semi Variable Cost
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Variable Cost
A cost that increases in total proportionately with an increase in activity and decreases
proportionately with the decrease in activity.(Variable Cost remain fixed per unit)
For Example:-Direct Material Cost. Packing Cost.Direct Labour Cost (Piece Rate).Indirect Material Cost.Normal Spoilage
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Fixed Cost
A Cost that does not change in total as business activity increases or decreases.
(Fixed Cost remain fixed in Total)
For Example :-Rent CostFixed WagesDepreciation
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Semi Variable Cost
A Cost that displays both fixed and variable characteristics.
For Example :-Electricity, Gas, Fuel, Oil etc.Maintenance CostTravelling and Entertainment Cost.Some Supplies.
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Cost based Pricing
Mark up Pricing (Cost Plus Pricing)
Price = Cost + Mark up
Preferable for Marketing and Trading Firms.
Slower turnaround, Larger Markup and vice-versa
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Cost Based Pricing
Full Cost Pricing (Absorption Cost Pricing)
Manufacturing Variable Cost Per Unit -----------+ Selling Variable Cost Per Unit -----------+ Administrative Variable Cost Per Unit -----------+ Manufacturing Fixed Cost Per Unit -----------+ Selling Fixed Cost Per Unit -----------+ Administrative Fixed Cost Per Unit -----------+ Profit Margin Per Unit -----------= PRICE
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Cost Based Pricing
Full Cost Pricing (Absorption Cost Pricing)
Estimated Fixed Unit Cost of the Product will be Based on Normal Level of Production and Sales
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Cost Based Pricing
Marginal Cost Pricing
All Variable Cost Per Unit ------------
+Some Portion of Fixed Cost Per Unit ------------
OR+ Zero Portion of Fixed Cost Per Unit
------------
= PRICESkills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org
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Cost Based Pricing
Marginal Cost Pricing
Marginal cost pricing targets at maximizing the contribution towards fixed costs.
It takes into account the cost and demand aspects.
Under competitive market conditions, marginal cost pricing is more useful.
A firm has a number of products/product lines, marginal cost pricing is useful.
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Contribution Margin
Sales - Variable Cost = Contribution Margin
100 - 65 = 35
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Break Even Point
A point of sales where company earns zero profit.
Sales - Variable Cost = CM – Fixed Cost = zero
100 - 65 = 35 – 35 = 0
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Break Even Sales (Amount)
Assume your Fixed Cost is Rs. 5,00,000 Your Variable Cost is 65% of your Sales. Now your Contribution Margin is 35%
Break Even Sales = Fixed Cost / CM * 100
5,00,000 / 35 * 100 = 14,28,571
Break Even Sales = 14,28,571
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Break Even Sales (Units)
Assume your Fixed Cost is Rs. 5,00,000 Sale Price is Rs 100 per unit Your Variable Cost is Rs 65 per unit Now your Contribution Margin is 35 per unit
Break Even Sales = Fixed Cost / CM per unit * 100
5,00,000 / 35 = 14,286 units
Break Even Units = 14,286
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Sales for 25% Profit
Sales for 25% Profit = Fixed Cost / (CM- Profit Ratio) * 100
5,00,000 / (35-25) * 100 = 50,00,000
Sales for 25% Profit = 50,00,000
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BREAK EVEN CALCULATION TABLE
Item Sold Price Total Sales
Variable Cost Per
Unit
Total Variable
CostContribution
MarginFixed Cost Total Cost Profit Profit %
300 500 150,000 300 90,000 60,000 100,000 190,000 (40,000) (26.67)
500 500 250,000 300 150,000 100,000 100,000 250,000 -
-
700 500 350,000 300 210,000 140,000 100,000 310,000 40,000 11.43
900 500 450,000 300 270,000 180,000 100,000 370,000 80,000 17.78
1,100 500 550,000 300 330,000 220,000 100,000 430,000 120,000 21.82
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BREAK EVEN CALCULATION TABLE FOR ROI
Item Sold Price Total Sales
Variable Cost Per
Unit
Total Variable
CostContribution
MarginFixed Cost Total Cost Profit Profit % Investment ROI
300 500 150,000 300 90,000
60,000 100,000 190,000
(40,000)
(26.67) 10,000,000 (4.80)
500 500 250,000 300 150,000
100,000 100,000 250,000
- - 10,000,000 -
700 500 350,000 300 210,000
140,000 100,000 310,000 40,000 11.43 10,000,000 4.80
900 500 450,000 300 270,000
180,000 100,000 370,000 80,000 17.78 10,000,000 9.60
1,100 500 550,000 300 330,000
220,000 100,000 430,000 120,000 21.82 10,000,000 14.40
1,409 500 704,500 300 422,700
281,800 100,000 522,700 181,800 25.81 10,000,000 21.82
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BREAK EVEN CALCULATION TABLE FOR PRICE AND DEMAND ANALYSIS (PROFIT BALACNE)
Item Sold Price Total
Sales
Variable Cost
Per Unit
Total Variable
CostContributio
n Margin CM % Fixed Cost Total Cost Profit Profit % Investment ROI
1,100
500
550,000
300
330,000
220,000 40.00
100,000
430,000
120,000
21.82
10,000,000
14.40
1,401
475
665,475
300
420,300
245,175 36.84
100,000
520,300
145,175
21.82
10,000,000
17.42
1,930
450
868,500
300
579,000
289,500 33.33
100,000
679,000
189,500
21.82
10,000,000
22.74
3,100
425
1,317,500
300
930,000
387,500 29.41
100,000
1,030,000
287,500
21.82
10,000,000
34.50
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BREAK EVEN CALCULATION TABLE FOR PRICE AND DEMAND ANALYSIS (ROI BALACNE)
Item Sold Price Total Sales
Variable Cost Per
Unit
Total Variable
CostContribution
Margin CM % Fixed Cost Total Cost Profit Profit % Investment ROI
1,100 500
550,000
300 330,000
220,000 40.00
100,000
430,000 120,000
21.82
10,000,000 14.40
1,257 475
597,075
300 377,100
219,975 36.84
100,000
477,100 119,975
20.09
10,000,000 14.40
1,467 450
659,925
300 439,950
219,975 33.33
100,000
539,950 119,975
18.18
10,000,000 14.40
1,760 425
748,000
300 528,000
220,000 29.41
100,000
628,000 120,000
16.04
10,000,000 14.40
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Method of Distributing Fixed Cost Among Different Items
It can be distributed at the basis of Material cost.
It can be distributed at the basis of Labour hours.
It can be distributed at the basis of Labour Cost.
It can be distributed at the basis of ABC Techniques.
(Activity Based Costing)Skills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org
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Demand Based Pricing
Skimming Pricing This strategy refers to a firm’s desire to skim the market by
selling at a premium price.
This method literally skims the market in the first instance through high price and then settles down for a lower price.
This means that at high price high profits in the introduction stage of the product.
This method is especially useful in the pricing of new products of luxury.
It also help in assessing the demand.Skills Developers (0092-3247661111) [email protected] www.skillsdevelopers.org
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Demand Based Pricing
Penetration Pricing It is opposed to the skimming strategy. Its objective is to attain market share in
high competitive market If product in not luxury and can capture a
large volume of sale, the firm can choose this method.
This strategy often heralds price war in the industry.
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Demand Based Pricing
Charging What the Traffic Will Bear As there are two principles in pricing.Cost of service principle and Value of service
principle. The second term is charging what the traffic
can bear. Professionals like doctors, lawyers, chartered accountants etc., adopt this principle.
A monopolist can afford to adopt this principle to maximize his profits.
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Pricing as per Competition
Discount PricingTrade Discount
It is kind of functional discount. It is given to the buyers buying for resale or for sub dealers.
Cash DiscountIt is a concession given to encourage to pay in full within a short period of the date of the bill or invoice. Generally the period to avail the cash discount is usually 10 days
Quantity DiscountTo encourage bulk or large purchases at a time, quantity discount is offered.
Seasonal DiscountDuring the slack season this discount is offered.
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Method of Adding Discount % in Price
If your sum of discounts is 15 %
Net Sale Price is 500
Than Gross Sale Price will be calculated as
500/(100-15)*100Or 500/85*100 = 588.24
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Pricing as per Competition
Premium Pricing If a firm has heterogeneity of demand for substitute
products with joint economies of scale. For example a colour television set.
This Pricing is used to capture High Income group customers.
Products will be displayed in Premium Stores.
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Pricing as per Competition
Going Rate Pricing It is commonly used in oligopolistic market.
This method assumes that there will be no price war within the industry.
new firms may follow a wrong pricing strategy.
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Pricing Strategies Mix
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Other Pricing Techniques
Psychological Pricing.Product Line Pricing or Package Pricing.Optional Product Pricing.
(Unique Product in a Range will be charged Extra)Captive Product Pricing
(Where products have complements, one will be charged high and other low)
Geographical Pricing.Value Pricing.
( value meals at McDonalds and other fast-food restaurants)
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Some Other Factors
Competitor AnalysisUpdate your Competitor Analysis Report at Weekly Basis
BrandingService techniques and consistency in policies will high your image which ultimately pays you
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