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Comprehensive assignment to include
contents of MM1
To be submitted in soft copy (File Name: --(Roll No)Ch (Chapter No)Nov (Date)
First by Nov 23
Quizzes & CT unannounced
No right to be late or absent
GR & Evaluation
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Price Determination
1
Bring your mind to full zero and ask thequestion how do we determine the price?
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The Three Cs of Pricing
Competition
CustomersCosts
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Meaning of price
Significance of price
Concept of price and value relationship Pricing objectives
Factors influencing price
Costs of producing and marketing a product Approaches to determining price
Break-even analysis
Lesson Overview
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Meaning of Price
PRICE
Amount of money and/or
other items with utilityneeded to acquire
a productTuition
Interest Rent
Fare
Wage
SalaryDues
Commission
Utility; Barter - Net4Barter 3
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Importance of Price
4
EconomyAffects Wages,
Rent, Interest &
Profits Firm
Demand determinant;
Only P giving revenue
Customer
Quality; Price/Non-price sensitive; Value component;
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Value
Product has ample value when
a. Price is Low? b. Price is High ? 5
Value = Benefits - Costs
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Pricing Objectives
Pricing
Objectives
Profit-oriented
Sales-oriented
Status Quo
Target return
Maximize
profits
Sales growth
Growth in
market share
Meeting
Competition
Non-price
Competition 6
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Pricing Objectives: Profit-Oriented
Achieve aTarget
Return
MaximizeProfits
7Retailers, Voltas, Motorola, Ciba Giegy, GE; Calculators
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Pricing Objectives: Sales-Oriented
Increase
SalesVolume
Maintain
or
Increase
Market
Share
8Automobile discounts, Seasonal discounts, Off-season discounts, etc; Japanese, Samsung, AIWA etc, Coca-Cola etc
Why higher market shareis important?
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Pricing Objectives: Status Quo
MeetCompetition
Stabilize
Prices
9Standard products - Steel, Chemicals, Wheat etc
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Factors Influencing Price
Estimated Demand
Competitive Reactions
Expected price
Demand curve
Price elasticity
Similar products
Unrelated products
Substitutes
10Base (List) price; Mochi/Power Agarwal Packers & Railway Freight Cinema Ticket vs Dinner at Dolari Dhani
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Estimated Demand
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Price and Marketing-Mix
Price
Promotion
Product
Distribution
Channels
12New/Established/Life Cycle stage/Trade-in/Returned for exchange/Leasing;
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Cost of a Product
Base price is also affected by its cost. Unit cost ismade of several types of costs. Cost conceptsfundamental to pricing are:
1. Fixed cost (rent, executive salaries, property tax,
etc) - remain constant regardless of how manyitems are produced. Difficult to change in the shortrun (but not in the long run). 1a. Total fixed cost - sum of all fixed costs.
1b. Average fixed cost - Total fixed cost divided by the
number of units produced.2. Variable cost, Costs such as labor or materials, etc
that is directly related to production.
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Cost of a ProductContd
2a - Total variable costis sum of all variable costs.More units produced, higher is this cost.
2b - Average variable cost - the total variable costdivided by the number of units produced.
3. Total cost - sum of total fixed cost and totalvariable cost for a specific quantity produced.
4. Average total cost - total cost divided by numberof units produced.
5. Marginal cost - cost of producing and sellingone more unit. Usually the marginal cost of the last unit is the same
as that unit's variable cost.
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Cost of a ProductContd
6. The average fixed cost curve declines as outputincreases due to spreading fixed costs over anincreasing number of units.
7. The average variable cost curve is U-shaped.
Starts high because variable costs are higher when onlya few units are produced.
Economies of scale cause per-unit costs to drop.
Diseconomies reoccur as production increases atextreme.
8. The average total cost curve is the sum ofaverage fixed cost and average variable cost.
9. The marginal cost curve depicts the cost of eachadditional unit; intersects average cost curve at its
lowest point. 15
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Unit Cost Curves of a Firm
Quantity
Price
Note how unit costs change as quantity increases. Using cost-
plus pricing, two units of output would be priced at Rs 184 each,
whereas four units would sell for Rs 120 each. 16
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Setting Base Price
Most companies set the base prices based on:
1. Total cost plus desired profit, and/or,
2. Marginal analysisa consideration of both
demand and supply, and/or,
3. Competitive market conditions.
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Cost-Plus Pricing
Setting the price of one unit
ofa product equal
to the totalcost of the unitplus the desired profit on the unit
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Babu Rao & Co: Cost-Plus Pricing
Babu Rao & Cos Costs, Selling
price, and Profit
No. of Flats built and sold by Babu
Rao & Co and finances (in Rupees)
Planned = 100 Actual = 80
Labor and material costs
(20,00,000 per Flat)
200,000,000 160,000,000
Overhead (fixed) costs 5,000,000 5,000,000
Total cost 205,000,000 165,000,000
Total sales at 22,55,000 per Flat 225,500,000 180,400,000
Profit: Total 20,500,000 15,400,000
Per Flat 2,05,000 1,92,500
As percent cost 10% 9.33%
Actual results often differ from planned outcomes because
various types of costs react differently to changes in output
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Cost Plus Pricing Another Example
For making 10,000 shirts, following needs to beinvested:
Fixed Cost Rs 1,50,000/- (Machines, Rent, etc)
Variable cost per shirt (Cloth, Collars, Buttons,
zippers etc) - Rs 30/- per shirt.
Cost per shirt is 45/-
You expect 30% return.
So price per shirt will be Rs 45/(1-0.3) = Rs64.28
Note the difference in calculating the return.
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Cost Plus Pricing - Limitations
Assumes all output will be produced and sold.
Market demand is ignored.
Does not recognize that total unit costs change as
output expands or contracts.
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Cost Plus Pricing - Limitations
However, Cost-plus methods can be refined to
address limitations.
Prices based on marginal costs only.
May be employed to maintain production and
labor during slack periods.
May be used if one product attracts business foranother.
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Pricing by middlemen
Wide use of cost-plus pricing.
Different retailer require different % markups due
to the nature of products/services handled.
Low-turnover products have higher mark-ups than high-
turnover products.
Extent of services offered affects mark-up.
Evidence for market-influenced pricing middlemen.
Most retail prices are really just offers to be accepted or
rejected. Many retailers do not use the same markup on all
products carried.
A middleman doesnt set base prices; it only adds
percentage to producers prices.23
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Markup Pricing by Retailers & Wholesalers
Cost to
Consumer
= Rs 150
Consumer
Cost and
Profit = 100%,
Or Rs 72
Manufactur-
ers selling
price is =
100%Or Rs 72
Manufacturer
Cost = 80%,
Or Rs 72
Markup =20%, Or
Rs 18 Wholesalers
Selling
price
= 100%
Or Rs 90
Wholesaler
Cost = 60%,
Or Rs 90
Markup =
40%, Or
Rs 60
Retailers
Selling
price
= 100%
Or Rs150
Retailer
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Evaluation of cost-plus pricing
It is used by many industrial firms.
Costs should be only one of the factors considered
in pricing.
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Break-Even Analysis
BREAK-EVEN POINT
The quantity of output
at which total revenue equals totalcosts,
assuming acertain selling price
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Sample Break-Even Chart
Profits
Losses Total Fixed Cost
BEP
Quantity in units
0 100 200 300 400 500 600 700 800 900 1000 1100 1200
Cost,
Revenue,
Profi
t
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000100,000
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Break-even analysis
Break-even point is the total fixed costs divided byunit contribution to overhead.
Unit contribution to overhead is the selling price
minus the average variable cost.
Two basic assumptions
Total fixed costs are constant.
Variable costs are constant per unit of output.
Ignores market demand at various prices. Can be useful in spite of limitations.
How??
Recollect Vora & Co28
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Prices based on Marginal Analysis
Profit
Maximizationpricing based on
Demand &
Costs
Might
Provoke
Price War
Apply to
Babu Rao & Co
& Shirts Co 29
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Base Price Determination Continuum
Cost-plus
Pricing
Cost & Market
based Pricing
Market-based
Pricing
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Market Based Pricing
Pricing Below
Competition
Pricing Above
Competition
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Pricing to Meet
Competition
How HP would price its LP?
How would Nirma/Ajanta price products?
How would L&T price breakers?
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Key Terms and ConceptsKey Terms and Concepts Price
Barter
Value
Pricing objectives Base price (list price)
Expected price
Inverse demand
Fixed cost
Total fixed cost
Average fixed cost
Variable cost
Total variable cost
Average variable cost
Total cost
Average total cost
Marginal cost
Average fixed cost curve
Average variable cost curve
Average total cost curve
Marginal cost curve
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Key Terms and ConceptsKey Terms and Concepts Cost-plus pricing
Break-even analysis
Break-even point
Marginal revenue
Average revenue
Pricing to meet competition
Perfect competition
Dynamic pricing
Kinked demand
Oligopoly
Pricing below competition
Pricing above competition
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MM2 Comprehensive Project
Each of you select a company on which you willdo the project.
Submit the list of companies selected by each of
you by 5th October, 1.00 PM
Think as if you are the marketing head of thatcompany.
Correlate the concepts learnt from day one
Submit the 1st
report covering up to lesson 11 onOct 20, 4.00 P.M.
Submit additions every 2-weeks (by Monday 4.00
P.M. of the following week) depending on what
developments take place in the class. 34
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What in Comprehensive Project?
Submit 1st
report on Oct 24, 4.00 P.M. Look at the company and its business.
Ch 2- Marketing Environment
Ch 4 - Consumer markets and buying behavior
Ch 5 - Business markets and buying behavior Ch 6 STP
Ch 7 Marketing Research
Ch 8 Product Planning and development
Ch 9 Product Mix strategies
Ch 10 Brands, Packaging and other product features
Ch 11 Services Marketing
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