Over the years, many different methods have been used by individual companies to establish base prices for their products. Most of these approaches are variations of following methods: Prices are based on total cost plus a desired profit Prices based on market demand and supply Prices based on competitive market conditions

1. BASIC METHODS FOR SETTTING
PRICES
Presented by:
Mian Nirwan Farooqi 6315

2. METHODS USED WORLDWIDE
 Over the years, many different methods have been
used by individual companies to establish base prices
for their products.
 Most of these approaches are variations of following
methods:
1) Prices are based on total cost plus a desired profit
2) Prices based on market demand and supply
3) Prices based on competitive market conditions

3. COST-PLUS PRICING
 Price are based on total cost-plus a desired profit
 Cost-plus pricing means setting the price of one unit of a
product equal to unit’s total cost plus the desired profit
on the unit.
 The total cost may include many type of costs like:
 Total fixed cost
 Average fixed cost
 Total variable cost
 Average variable cost
 Marginal cost
 The profit can be fixed but usually a percentage is defined
e.g. 5% 10% on total cost of the product.

4. COST-PLUS PRICING
 Take a look at this diagram which show how price is
determined and finally available for customer.

5. COST-PLUS PRICING
 Let’s suppose that a company manufactures stationary
items ball pens, pointer and markers.
 The marker cost as
 Rs 14 for body
 Rs 4 for ink
 Rs 6 tip
 Rs 2 for packaging
 Rs 4 for trans
The total cost will be Rs 30
 If company enjoy a profit of 20% i.e. (Rs 6) on product then
 The Price for this marker will be Rs 36.
 and if profit ratio is set as 10% then final price will be Rs 33

6. BREAK EVEN ANALYSIS
 A break even point is that quantity of output (number of
units produced) at which the sales revenue equals the
total costs, assuming a certain selling price.
 FORMULA:
 In simple words when a new business is started or new
product is introduced, a time occur when all expenses
occurred due to that product are recovered by revenue.

7. BREAK EVEN ANALYSIS
 It means the break-even point depends upon the selling price
 HIGHER THE SELLING PRICE, EARLIER BREAK EVEN
WILL BE ACHIEVED and vice versa
 It helps in determining selling price when we set price on basis
of market demand
 The following diagram illustrates that how SELLING PRICE
helps in achieving break-even point of a company.

8. BREAK EVEN ANALYSIS
Break-Even points achieved at different point at different prices.

9. PRICES BASED ON MARKET DEMAND SUPPLY
 This method of price setting involves balancing demand with
costs to determine the best price for profit maximization.
 The companies whose goal is to maximize profit while
ignoring market share, expansion, repute and other aspects;
can adopt this method for setting prices for their products.

10. PRICES BASED ON MARKET DEMAND SUPPLY
 Take a look at following demand and supply schedule to
understand that how a company can set prices according
to market demand supply.

11. PRICES SET IN RELATION TO MARKET ALONE
 A firm is most likely to use this method when the market is
highly competitive and firm’s product is not differentiated
significantly from its competitors.
 To some extent, this method of pricing reflects market
conditions that parallel those found under perfect
competition.

12. PRICES SET IN RELATION TO MARKET ALONE
 Here prices are determined according to fluctuating
market competition conditions
 Some time a company may give special offers or discount
and packages to attract more and more customers.