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Maxwell Ranasinghe
B.Sc. ( Business Administration) Hons. MAAT, Attorney at Law, CPM ( New Haven- USA)
PRICING
IMPORTANCE OF PRICING PRICING OBJECTIVES FACTORS TO CONSIDER IN PRICING CONCEPTS OF COSTING FOR PRICING PRICING STRATEGIES SETTING THE FINAL PRICE
Pricing Objectives
Financial Objectives
Profit - Return of investment - Profit maximisation Cash Flow
Contribution
Contribution is the amount that contributed by sales to recover the Fixed Cost when Variable Cost is deducted from the Sales Price. Selling Price (Rs. 40) Variable Cost ( Rs. 15)= Contribution (Rs. 25) So the contribution will help a firm to find out many important aspects such as Break Even Point, how many should be manufactured to earn a given amount of profits etc,.
Costing Formulas
Fixed Cost (FC) Selling Price (SP) Contribution per unit (CPU)= SP-VC Break Even Point= Income=Total Expenses( No profit or loss) Units to BEP= FC/CPU Units to Expected profit= FC+Profit/CPU
Variable cost
Production - Cloths Units meter p/u 0 1.5 1000 1.5 2500 1.5 5000 1.5 6250 1.5 Price Per meter 10 10 10 10 10 Variable Cost
Fixed Cost
Units produced Fixed coste.g. rent 0 1000 100000 100000 Total Fixed cost 100000 100000
2500
5000 6250
100000
100000 100000
100000
100000 100000
0
1000
0
15000
100000
100000
100000
115000
2500
5000 6250
37500
75000 93750
100000
100000 100000
137500
175000 193750
100000
200000 250000
AND COST
250000 200000 150000 100000 50000
COST/REVENUE
VC FC TOTAL REVENUE
2500
5000 UNITS
7500
0 10000
Break Even Point Sale Price Rs. 40.00 Variable Cost Rs. 15.00 Contribution ( 40- 15) Rs. 25.00 BEP = Fixed Cost Contribution BEP = 100000 = 4000 25 Once the BEP is reached all the FC is recovered. Then the contribution becomes a profit. The you can manipulate the pricing in many ways.
How many items should be manufactured to earn a profit of Rs. 200,000 FC + Profit CPU 100000 + 200000 = 12000 25 40 x 12000 = 480,000 VC 15 x 12000 = 180,000 FC = 100,000 Profit = 200,000
Pricing Strategies
Cost Based (Internal Oriented) Pricing Demand (Market/ Customer) Based Pricing Competitor Based Pricing
Margin on sales price pricing The difference in this calculation is that profit margin is based on sales price but the cost of the product is given for calculation Cost Rs. 16.00 calculate the price with a mark up/ margin of 20% on sales
Margin on sales
formula =
cost
1 markup
Mark up pricing
This is the most common and elementary pricing system used by many. This could be done in two ways : one by adding a markup on sales price and other by adding a mark up to cost. E.g. What would be the price of a product costing Rs. 16.00, if mark up on sales 20% or Markup on cost is 20% Mark up on sales: Cost 16.00 = 20.00 1- markup 1-.20 Profit = 4.00 Mark up on cost : Cost x 1+.20 16 x 1.20 = 19.20 Profit = 3.90
Value Pricing
Value pricing is fixing a lower price for good quality products. It is called value for money pricing . E.g.. House of Fashion
Group Pricing Companies offer special prices when a group of buyers intend buying products. Singer and Abans are using this type of pricing by visiting work places of their customers. They usually collaborate with Welfare Societies of employees and arrange these kind of sales and offer better prices and terms. They call it Group Sales for these type of selling.