Page 155 - DMGT310_ENTREPRENEURSHIP_AND_SMALL_BUSINESS_MANAGEMENT

Entrepreneurship and Small Business Management

Notes Fixed Cost ` 300,000
Expected Unit sales ` 50,000
The manufacturer’s unit cost is given by
Unit Cost = VC + (FC/Unit Sales)

= ` 10 + (300,000/50,000) = ` 16
Now assume the manufacturer wants to earn a 20% markup on sales. The manufacturer’s
markup price is given by:

Unit Cost
Markup Price = = 16/(1–.02) = ` 20
(1 Desired return on sales− )
The manufacturer would charge dealers ` 20 per toaster and make a profit of ` 4 per unit.
Markup varies considerably among different goods. Markups are generally higher on
seasonal items (to cover the risk of not selling), specialty items, slow moving items, items
with high storage and handling cost.

2. Target-Return Pricing: The firm determines the price that would yield its target rate of
return on investment (ROI). Target pricing is used by General Motors, which prices its
automobiles to achieve a 15 to 20% ROI.
Desired return × invested capital
Target-Return Price = Unit Cost +
Unit sales
3. Perceived –Value Pricing: An increasing number of companies are basing their price on
the product’s perceived value. They see the buyer’s perception of value, not the seller’s
cost, as the key to pricing. They use the non-price variables in the marketing mix to build
up perceived value in the buyers’ minds. Price is set to capture the perceived value.

4. Value Pricing: In recent years, several companies have adopted value pricing in which
they charge a fairly low price for a high-quality offering. Value pricing says that the price
should represent a high-value offer to consumers.
5. Going rate pricing: In going-rate pricing, the firm pays less attention to its own costs or
demand and bases its price largely on competitor’s price.

6. Sealed-bid pricing: Competition-oriented pricing is common where firms submit sealed
bids for jobs. The firm bases its price on expectations of how competitors will price rather
than on a rigid relation to the firm’s costs or demand. The firm wants to win the contract,
and winning normally requires submitting a lower price than competitors. At the same
time, the firm cannot set its price below cost without worsening its position.
10.3.2 Various Strategies for Pricing

Following are few of the strategies for pricing a product:

Premium Pricing

Use a high price where there is a unique brand. This approach is used where a substantial
competitive advantage exists and the marketer is safe in the knowledge that they can charge a
relatively higher price. Such high prices are charged for luxuries such as Cunard Cruises, Savoy
Hotel rooms, and first class air travel.

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