Pricing techniques for profit maximization

BY
SKILLS DEVELOPERS
1
Pricing Techniques for Profit
Maximization
Skills Developers (0092-3247661111) info@skillsdevelopers.org www.skillsdevelopers.org

What is Price
2
The amount of money charged for a product and
services is called Price

Objective of Pricing
3
 Profit Maximization
 High Market Share by attracting and retaining
customers
 To attain Status Quo by Stable Price
 Meeting Competition in Market
 High Return on Investment

Fact0rs you will consider before Pricing
4
 How should I price my product?
 Market Size.
 Customer Price Sensitivity.
 Estimated sales at different price levels.
 How much market share will effect if change appear?
 Product Costs.
 Current and potential competitive reactions.
 Nonprice factors, such as features and performance.
(Quality, uniqueness, availability, convenience,
service, and warranty)

Marketing Management
5
Marketing management is about placing the right
product, at the right price, at the right place, at the
right time.

Price Determination Methods
6
 Cost Base Pricing
 Break Even Concept
 Demand Base Pricing
 Pricing as per Competition

What is Cost
What you pay in monetary terms to get or
achieve a objective is called its Cost.
Material Cost.
Labour Cost.
FOH Cost.
Selling Cost
Administrative Cost.
Financial Cost.
7

KINDS OF COSTS
8
 Variable Cost
 Fixed Cost
 Semi Variable Cost

Variable Cost
9
A cost that increases in total proportionately with an
increase in activity and decreases proportionately with
the decrease in activity.
(Variable Cost remain fixed per unit)
For Example:-
Direct Material Cost.
Packing Cost.
Direct Labour Cost (Piece Rate).
Indirect Material Cost.
Normal Spoilage

Fixed Cost
10
A Cost that does not change in total as business
activity increases or decreases.
(Fixed Cost remain fixed in Total)
For Example :-
Rent Cost
Fixed Wages
Depreciation

Semi Variable Cost
11
A Cost that displays both fixed and variable
characteristics.
For Example :-
Electricity, Gas, Fuel, Oil etc.
Maintenance Cost
Travelling and Entertainment Cost.
Some Supplies.

Cost based Pricing
12
Mark up Pricing (Cost Plus Pricing)
Price = Cost + Mark up
Preferable for Marketing and Trading Firms.
Slower turnaround, Larger Markup and vice-versa

Cost Based Pricing
13
Full Cost Pricing (Absorption Cost Pricing)
Manufacturing Variable Cost Per Unit -----------
+ Selling Variable Cost Per Unit -----------
+ Administrative Variable Cost Per Unit -----------
+ Manufacturing Fixed Cost Per Unit -----------
+ Selling Fixed Cost Per Unit -----------
+ Administrative Fixed Cost Per Unit -----------
+ Profit Margin Per Unit -----------
= PRICE

Cost Based Pricing
14
Full Cost Pricing (Absorption Cost Pricing)
 Estimated Fixed Unit Cost of the Product will be
Based on Normal Level of Production and Sales

Cost Based Pricing
15
Marginal Cost Pricing
All Variable Cost Per Unit ------------
+Some Portion of Fixed Cost Per Unit ------------
OR
+ Zero Portion of Fixed Cost Per Unit ------------
= PRICE

Cost Based Pricing
16
Marginal Cost Pricing
 Marginal cost pricing targets at maximizing the
contribution towards fixed costs.
 It takes into account the cost and demand aspects.
 Under competitive market conditions, marginal cost
pricing is more useful.
 A firm has a number of products/product lines,
marginal cost pricing is useful.

Contribution Margin
17
Sales - Variable Cost = Contribution Margin
100 - 65 = 35

Break Even Point
18
A point of sales where company earns zero profit.
Sales - Variable Cost = CM – Fixed Cost = zero
100 - 65 = 35 – 35 = 0

Break Even Sales (Amount)
19
Assume your Fixed Cost is Rs. 5,00,000
Your Variable Cost is 65% of your Sales.
Now your Contribution Margin is 35%
Break Even Sales = Fixed Cost / CM * 100
5,00,000 / 35 * 100 = 14,28,571
Break Even Sales = 14,28,571

Break Even Sales (Units)
20
Assume your Fixed Cost is Rs. 5,00,000
Sale Price is Rs 100 per unit
Your Variable Cost is Rs 65 per unit
Now your Contribution Margin is 35 per unit
Break Even Sales = Fixed Cost / CM per unit * 100
5,00,000 / 35 = 14,286 units
Break Even Units = 14,286

Sales for 25% Profit
21
Sales for 25% Profit = Fixed Cost / (CM- Profit Ratio) * 100
5,00,000 / (35-25) * 100 = 50,00,000
Sales for 25% Profit = 50,00,000

BREAK EVEN CALCULATION TABLE
Item
Sold
Price Total Sales
Variable
Cost Per
Unit
Total
Variable
Cost
Contribution
Margin
Fixed
Cost
Total Cost Profit Profit %
300 500 150,000 300 90,000 60,000 100,000 190,000 (40,000) (26.67)
500 500 250,000 300 150,000 100,000 100,000 250,000 - -
700 500 350,000 300 210,000 140,000 100,000 310,000 40,000 11.43
900 500 450,000 300 270,000 180,000 100,000 370,000 80,000 17.78
1,100 500 550,000 300 330,000 220,000 100,000 430,000 120,000 21.82

BREAK EVEN CALCULATION TABLE FOR ROI
Item
Sold
Price Total Sales
Variable
Cost Per
Unit
Total
Variable
Cost
Contribution
Margin
Fixed
Cost
Total Cost Profit
Profit
%
Investment ROI
300 500 150,000 300 90,000 60,000 100,000 190,000 (40,000) (26.67) 10,000,000 (4.80)
500 500 250,000 300 150,000 100,000 100,000 250,000 - - 10,000,000 -
700 500 350,000 300 210,000 140,000 100,000 310,000 40,000 11.43 10,000,000 4.80
900 500 450,000 300 270,000 180,000 100,000 370,000 80,000 17.78 10,000,000 9.60
1,100 500 550,000 300 330,000 220,000 100,000 430,000 120,000 21.82 10,000,000 14.40
1,409 500 704,500 300 422,700 281,800 100,000 522,700 181,800 25.81 10,000,000 21.82

BREAK EVEN CALCULATION TABLE FOR PRICE AND DEMAND
ANALYSIS (PROFIT BALACNE)
Item
Sold
Price
Total
Sales
Variabl
e Cost
Per
Unit
Total
Variable
Cost
Contributio
n Margin
CM % Fixed Cost Total Cost Profit Profit %
Investmen
t
ROI
1,100 500 550,000 300 330,000 220,000 40.00 100,000 430,000 120,000 21.82 10,000,000 14.40
1,401 475 665,475 300 420,300 245,175 36.84 100,000 520,300 145,175 21.82 10,000,000 17.42
1,930 450 868,500 300 579,000 289,500 33.33 100,000 679,000 189,500 21.82 10,000,000 22.74
3,100 425 1,317,500 300 930,000 387,500 29.41 100,000 1,030,000 287,500 21.82 10,000,000 34.50

BREAK EVEN CALCULATION TABLE FOR PRICE AND DEMAND
ANALYSIS (ROI BALACNE)
Item
Sold
Price Total Sales
Variable
Cost Per
Unit
Total
Variable
Cost
Contribution
Margin
CM % Fixed Cost Total Cost Profit Profit % Investment ROI
1,100 500 550,000 300 330,000 220,000 40.00 100,000 430,000 120,000 21.82 10,000,000 14.40
1,257 475 597,075 300 377,100 219,975 36.84 100,000 477,100 119,975 20.09 10,000,000 14.40
1,467 450 659,925 300 439,950 219,975 33.33 100,000 539,950 119,975 18.18 10,000,000 14.40
1,760 425 748,000 300 528,000 220,000 29.41 100,000 628,000 120,000 16.04 10,000,000 14.40

Method of Distributing Fixed Cost Among Different Items
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 It can be distributed at the basis of Material cost.
 It can be distributed at the basis of Labour hours.
 It can be distributed at the basis of Labour Cost.
 It can be distributed at the basis of ABC Techniques.
(Activity Based Costing)

Demand Based Pricing
27
Skimming Pricing
This strategy refers to a firm’s desire to skim the market by
selling at a premium price.
This method literally skims the market in the first instance
through high price and then settles down for a lower price.
This means that at high price high profits in the introduction
stage of the product.
This method is especially useful in the pricing of new products
of luxury.
It also help in assessing the demand.

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Penetration Pricing
 It is opposed to the skimming strategy.
 Its objective is to attain market share in high
competitive market
 If product in not luxury and can capture a large
volume of sale, the firm can choose this method.
 This strategy often heralds price war in the
industry.

29
Charging What the Traffic Will Bear
 As there are two principles in pricing.
 Cost of service principle and Value of service
principle.
 The second term is charging what the traffic can
bear. Professionals like doctors, lawyers, chartered
accountants etc., adopt this principle.
 A monopolist can afford to adopt this principle to
maximize his profits.

Pricing as per Competition
30
Discount Pricing
 Trade Discount
It is kind of functional discount. It is given to the buyers buying for
resale or for sub dealers.
 Cash Discount
It is a concession given to encourage to pay in full within a short period
of the date of the bill or invoice. Generally the period to avail the cash
discount is usually 10 days
 Quantity Discount
To encourage bulk or large purchases at a time, quantity discount is
offered.
 Seasonal Discount
During the slack season this discount is offered.

Method of Adding Discount % in Price
31
 If your sum of discounts is 15 %
 Net Sale Price is 500
 Than Gross Sale Price will be calculated as
500/(100-15)*100
Or 500/85*100 = 588.24

32
 Premium Pricing
 If a firm has heterogeneity of demand for substitute
products with joint economies of scale. For example a
colour television set.
 This Pricing is used to capture High Income group
customers.
 Products will be displayed in Premium Stores.

33
 Going Rate Pricing
 It is commonly used in oligopolistic market.
 This method assumes that there will be no price
war within the industry.
 new firms may follow a wrong pricing strategy.

Pricing Strategies Mix
34

Other Pricing Techniques
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 Psychological Pricing.
 Product Line Pricing or Package Pricing.
 Optional Product Pricing.
(Unique Product in a Range will be charged Extra)
 Captive Product Pricing
(Where products have complements, one will be charged
high and other low)
 Geographical Pricing.
 Value Pricing.
( value meals at McDonalds and other fast-food
restaurants)

Some Other Factors
36
 Competitor Analysis
Update your Competitor Analysis Report at Weekly
Basis
 Branding
Service techniques and consistency in policies will
high your image which ultimately pays you

Pricing techniques for profit maximization

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