Pricing Concepts

https://www.youtube.com/watch?v=UqFPWeCeFCI

The Importance of Price

To the seller price is revenue

To the consumer price is the cost of

something

Revenue=The price charged to customers multiplied by the number of units sold

Profit=Revenue -expenses

Pricing Objectives

1. Profit Maximization

Setting prices so that total revenue is as large as possible relative to total costs

3.Establishing a Competitive Position

Placing prices above, equal to or below those of competitors

2. Sales Volume Maximization

To increase the volume of sales each year

Market Share- a company’s product sales as a percentage of total sales for that industry.

Return on Investment (ROI)

Net profit after taxes divided by total assets

ROI = Net profit after taxes Total assets

The Role of Demand in PricingDemand - the quantity of a product that will be sold in the market at various prices for a specified period of time.

Supply – The quantity of a product that will be offered to the market by a supplier at various prices for a specific period of time.

Price Equilibrium- The price at which demand and supply are equal.

Elasticity of Demand- consumer’ responsiveness or sensitivity to changes in price.

Factors that affect elasticity of demand

Availability of substitutesPrice relative to purchasing powerProduct durabilityA product’s other usesRate of inflation

Cost Determinants of Price

Types of Costs Variable Costs Fixed CostsVaries with changes in Does not change as level of outputlevel of output changes raw materials, Rent and ratesdirect labour, fuel Depreciationrevenue-related costs such as commission. Administration costs

Research and development

Marketing costs (non- revenue related)

Understanding the BEPTotal Revenue= Selling Price(P) per unit x # of units sold(X)Total Costs = Fixed Costs (TFC) + Variable Costs(V)

• px = vx + FC + Profit• Where,

p is the price per unit,x is the number of units,v is variable cost per unit andFC is total fixed cost.

Break Even Point

• The break-even level or break-even point (BEP) represents the sales amount—in either unit or revenue terms—that is required to cover total costs (both fixed and variable).

• Total profit at the break-even point is zero.

• Break-even is only possible if a firm’s prices are higher than its variable costs per unit.

• If so, then each unit of the product sold will generate some “contribution” toward covering fixed costs.