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Pricing methods

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Pricing methods

  1. 1. PRICING METHODS Marketing Management
  2. 2. Pricing An introduction  Pricing method or strategy is the route taken by the firm in fixing the price.  The method/strategy must be appropriate for achieving the desired pricing objectives.
  3. 3. Pricing methods 1. Cost Based Pricing Types of cost based pricing     Mark-Up Pricing(cost plus pricing) Absorption cost pricing (full cost pricing) Target rate of return pricing Marginal cost pricing
  4. 4. Mark-up pricing • The selling price is fixed by adding Mark-up or Margin to its cost. • Usually used by:  Distributers, Marketing firms etc.. • Slower the turnaround of the product larger the margin and vice versa. Example: Supplyco.
  5. 5. Absorption cost pricing • Mainly used by manufacturing firms. • It uses standard costing techniques. • It includes : – – – – Fixed cost Variable cost Selling and administering cost Advertisement cost • It is also known as full cost pricing. + PAROFIT
  6. 6. Target rate of return pricing • Similar to Absorption cost pricing. • The difference is in fixing the profit margin. • The profit margin/ mark up is fixed by considering the ROI. • Firm will have return objectives, like 5% of invested capital, or 10% of sales revenue. • Then you arrange your price structure so as to achieve these target rates of return. • Market leaders or monopolists uses this pricing strategy.
  7. 7. Marginal Cost Pricing • It takes cost and demand into consideration while fixing the price. • It aims at maximizing contribution towards fixed cost. • It gives flexibility to recover the fixed cost depending on the market condition. • It also gives flexibility in recovering a large portion of cost from certain segment and a small portion from some other segment.
  8. 8. Revenue / Cost (Rs) Break-even concept Total Cost B Variable cost Fixed Cost Out Put
  9. 9. Pricing methods 2. Demand Based Pricing  The pricing decision is also depending on Demand and supply of the commodity.  More realistic . Types of cost based pricing are: • What the traffic can bear pricing • Skimming pricing • Penetration pricing
  10. 10. “What the traffic can bear” • The seller sets the maximum price the buyers are willing to pay in giver circumstances. • It will bring a high profit during this period. • Chance of error in judgment are very high. • Can be used in the following conditions. – Shortage of goods – Monopoly – Oligopoly
  11. 11. Skimming Pricing • Initially the products will be introduced in a high price and subsequently settle down for a lower price. • Example: Mobile Phones, Televisions etc.. Most of the electronic items.
  12. 12. Penetration pricing • Initially introduced at a lower price and increases its price as its demand in the market increases. • Good to capture new market. • Opposite of skimming. • Keep the product out of competition for longer time. • Example: DTH Services, Magazines, TV channels etc..
  13. 13. 3. Competition Oriented Pricing • It need not mean that pricing the commodity matching its competitors, it can also be the following: – Premium pricing – Discounted Pricing – Parity Pricing/going rate pricing
  14. 14. 4.Product line pricing • The products in a given product line are related to each other. • The manufacturing cost of these products also will not be much different. • The need not price the product optimally but it may price the product line optimally. • It is mainly indented to get optimum profit from the line. Example: Pulsar 150, 180, 200, 220
  15. 15. 5.Tender pricing • Industrial products • The customers go by competitive bidding through sealed tenders. • The seller can only get the best possible price. • He should thoroughly analyze the competitors.
  16. 16. 6. Affordability based Pricing • Essential commodities • Social welfare pricing • The idea of this pricing is to make the product available to the targeted population at an affordable rate. • Items usually distributed through public distribution system. • Subsidies may be involved • Example: Chick shampoo , Akash, medicine etc.
  17. 17. 7. Differentiated pricing • Different price for the same product in different location. (SanDisk cruzer balde Pen-drive, Petrol ) • The price difference may also be made in the case of customer class. • Volume of purchase. ( Offer packs Lux soap, Colgate value packs etc)

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