pricing strategies in Managerial economics

2. Price and Prising
 Price is the amount of money charged for
a good or service. It is the sum of all the
values that consumers give up for the
product.
 Pricing is a Process of determining what a
company will receive in exchange of its
product.

3. PRICING OBJECTIVES
• Survival
• Profit Maximisation
• Target return on Investment
• Market Share goals
• Status quo pricing

4. Factors to consider when Pricing:

5. Basic Pricing Concepts:
Three basic pricing concepts to consider when
determining the price for any given product:
cost-oriented pricing
demand-oriented pricing
competition-oriented pricing

6. Cost – Oriented Pricing
1.Marketers first calculate the costs making a
product and their expenses of doing
business.
2.Then add their projected profit margin to
these figures to arrive at a price.

7. Cost Based Pricing
product
Cost
Price
Value
Customers

8. Classifications of Cost based
Pricing
• Cost plus Pricing
• Break – Even Pricing
• Target Return Pricing
• Early Cash recovery Pricing

9. COST-PLUS PRICING
• Cost-Plus pricing also called “Mark-up
Pricing” and “Full cost Pricing”
• In this method the firm to first estimate the
Average Variable Cost (AVC) of producing or
purchasing and marketing the product for a
normal or standard level of output.

10. • The firm then adds to the AVC an average
overhead charge, so as to get the estimated
fully allocated average cost.
• To this fully allocated average cost, the firm
then adds a mark-up on cost for profits.

11. • The formula for the Mark-up on cost can, thus,
be expressed as
m =
𝑷−𝑪
𝑷
Where,
m is the mark-up on cost,
p is the product price
c is the fully allocated average cost of the
product.
(p-c) is called the profit margin.

12. • We get the price of the product in a cost-plus
pricing scheme. That is,
p = C(1 + m)
Where,
p is the product price,
C is the fully allocated average cost of the
product,
m is the mark-up on cost.

13. Example:
• Suppose that a firm takes 80 % of its capacity
output of 125 units as the normal of standard
output, that it projects total variable and
overhead costs for the year to be respectively,
1000 and 600 for the normal or standard
output, and that it wants to apply a 25% mark-
up on cost.

14. • Then the normal or standard output is 100
units, the AVC = Rs.10 and the average
overhead cost = Rs.6. thus, C = Rs.16 and
p =16(1 + 0.25) = Rs.20
With m =
𝟐𝟎 −𝟏𝟔
𝟏𝟔
= 0.25

15. Advantages of Cost-Plus pricing:
• Cost-Plus pricing generally requires less
information and less precise data than the
rule of setting price at the output level at which
marginal revenue equal to marginal cost.
• It seems easy and simple to use.

16. • Cost-Plus pricing usually results in relatively
stable prices when costs do not vary very
much over time.
• Cost-Plus pricing can provide a clear
justification for price increases when costs
rise.

17. CRITICISMS (Disadvantages):
• Cost-plus pricing is based on accounting and
historical costs, rather than on replacement
and opportunity costs.
• It is based on the average, rather than on the
marginal, cost of production.
• Cost-plus pricing is criticised because it
ignores conditions of demand.

18. References:
1. Managerial Economics, principles and worldwide
applications, eighth edition(2019) , Dominick
salvatore, siddhartha K.Rastogi.
2. Various Online sources.