Major Influences On Pricing Decisions 17385d

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. • 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”.

• 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.

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 & istrative expenses) -any other cost incurred by the firm used

Consider the following data: variable manufacturing costs P192,000 variable selling and istrative costs 24,000 fixed manufacturing costs fixed selling and istrative costs total cost average amount of capital investments P300,000 normal annual sales units total cost per unit (P384,000 / 480 units) desired rate of return

120,000 48,000 P384,000

480 P800 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 markup, 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 add, desired profit total selling price divided by the number of units selling price per unit (P444,000 / 480) 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

P384,000 60,000 P444,000 480 P925 per unit

General Formula to determine the markup percentage on cost

Profit Required Markup percentage = to achieve target applied to cost base Annual volume ROI x

+ Total annual costs not Included in cost base 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

Selling Price

x (216,000)

= P450 x (100%) = P925

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

Selling Price

x [(P192,000 + 120,000) / 480 ]

= P650 + (100% + 42.307%)

= P925