Published On:Sunday 27 November 2011
Posted by Muhammad Atif Saeed
PRICING DECISIONS
PRICING DECISIONS
The Economist’s Approach to Pricing
If a company raises the price of a product, unit sales ordinarily fall. Because off this pricing is a delicate balancing act in which the benefits of higher revenues per unit are traded off against the lower volume that results from charging higher prices.
Price Elasticity of demand (PED)
Price elasticity of demand is the degree of sensitivity of demand for a good to changes in price of that good.
PED= percentage change in quantity demanded
Percentage change in price
PED>1, demand is relatively elastic and the quantity demanded is very responsive to price changes, when PED<1, demand is relatively inelastic and the quantity demanded is not very responsive to price change.
When demand is elastic, total revenue rises as price falls. When demand is inelastic, total revenue falls when price rises. A fall in the price gives rise to a more than proportionate rise in quantity demanded.
Factors that determine the degree of elasticity
- The price of the product
- The price of other product Coc- pepsi
- Income ( Normal , inferior)
- Tastes and fashion
- Expectation
- Obsolescence
- Necessities – basic item in elastic
Cost plus pricing
- The absorption of indirect costs over the firm’s products will ensure that the indirect costs are all coupled in the sales of the product.
- The firm cannot afford to sell at less than full cost
- The firm will be able to earn reasonable rate of return.
- The pricing system is simple and cheap to operate.
- Control is exercised over pricing- no product are under or over priced.
Ten ways to ‘increase’ prices without increasing price
1. Revise the discount structure
2. Change the minimum order size
3. Charge for delivery and special services
4. Invoice for repairs on serviced equipment
5. Charge for engineering, installation
6. Charge for overtime on rushed orders
7. Collect interest on overdue accounts
8. Produce less of the lower margin models in the line
9. Write penalty clauses into contracts
10. Change the physical characteristics of the product
