Consumer demand influences: Consumer demand is a

major influence on all aspects of the operations. The

customers influence pricing through their demand for
product and services. Consideration is given to the price
that customers are willing to pay, the quality desired, and
any accompanying trade-offs. Identifying customer demand
is critically important and on a continuous process.
Companies routinely use market research and test
marketing to gain such information. High quality
products, high price or low price, low quality
products.

Taking pricing decision is one of the critical factors of
business. To take the pricing decision a proper
research needs to be carried out such as on the
product availability, competitor's pricing strategy,
customer's perceived pricing, customers willingness to
pay the price of the product, demand factor etc.

Consider competitors strategies: Competitors
influence prices through their actions. Alternative or
substitute products of a competitor may affect demand
and force a business to lower its prices. A company
cannot set prices without considering the products and
pricing strategies of competitors.

Costs importance is industry specific: Costs are a
factor in the pricing process, more in some industries than
in others. The cost influences price through its effect
on the supply. The lower the cost, the more companies
are willing to supply. In agriculture, for example, grain and
meat prices are market-driven (focus
on internal competencies that foster greater
responsiveness to their customers and
their target market). In many other cases (gasoline and
automobiles), prices are set by adding a markup to cost.
Generally speaking, prices are set by considering both
cost and market influences.


1.Legal Area
2.Political Conditions
3.Image-related issues
Normal pricing computations and their normal formula the
concern of this chapter is to determine the required selling
prices given certain bases, generally, cost based.

Selling price = cost + mark-up

the mark-up is normally represented by a certain percent of
the base used. The cost used as the base in computing the
mark up could be base on:

-total full cost (manufacturing and operating costs)
-total manufacturing costs only
-total variable manufacturing costs only
-total variable costs (manufacturing and selling &
administrative expenses)
-any other cost incurred by the firm used

Consider the following data:

variable manufacturing costs
P192,000
variable selling and administrative costs
24,000
fixed manufacturing costs 120,000
fixed selling and administrative costs 48,000
total cost P384,000
average amount of capital investments
P300,000
normal annual sales 480
units total cost per unit (P384,000 / 480 units) P800
desired rate of return 20%
As markup is a certain percent of the base
used the difficult part is determining that the
mark-up percentage. The most common basis is
the desired rate of return. Though there is no rule
required as to the amount or percentage of mark-
up, deciding on this rate would definitely affect
price and ultimately the volume of sales at every
given time.

first step is to compute the desired profit using the desired rate of return.

Average investment x desired ROI rate = target profit

P300,000 x 20% = P60,000

or:

total costs P384,000
add, desired profit 60,000
total selling price P444,000
divided by the number of units 480
selling price per unit (P444,000 / 480) P925 per unit

desired profit per unit = desired profit / total number of units
= P60,000 / 480 = P125 per unit

total costs of P800 + profit per unit P125 = P925
General Formula to determine the markup percentage on cost

Markup percentage =
applied to cost base
Profit Required
to
achieve target
ROI
+ Total annual costs not
Included in cost base
Annual volume
x
Cost base per unit
used
General formula to determine the selling price per unit

Selling price per unit = Case base per unit x (100% + mark up on cost)

Assume that the following cost bases:

1. Cost based is the total (full cost):

Markup % on cost =
P60,000 + 0
480 x P800
= 15.63 of 115.63 %

2. Cost plus pricing based on total variable costs
Markup percentage = P60,000 + P168,000 = 105.56%
480 x (216,000)

Selling Price = P450 x (100%) = P925

3. Cost-plus pricing based on total manufacturing cost
Markup percentage = P60,000 + (P24,000 + P48, 000) = 42.307%
480 x [(P192,000 + 120,000) / 480 ]

Selling Price = P650 + (100% + 42.307%) = P925