1. Price strategy: Pricing Methods

2. COST BASED PRICING
In the case of cost base pricing, a company arrives at a list price for the product by calculating its total costs and then adding a desire profit margin
The calculation for such cost include the following:
Fixed Costs
Costs that do not vary with different quantities of output (equipment, light, heat, power, ect)
Variable Costs
Change according to the level of output (labor and raw materials)
Variable costs may rise or fall depending on production level
Generally, the more a firm is producing the cheaper the product is to make due to more efficiency in labor and cheaper mass purchases of supplies and materials
In long term, firm must establish pricing strategy to recover total costs (fixed plus variable)
Companies have three choices in pricing to do so: full-cost pricing, target pricing, break even pricing

3. Cost Based Pricing: Full-Cost
In order to gain profit, a desired profit margin is added to the full cost of the price
In such a system, profits are based on costs rather than on demand or revenue of a product
When a firm established a desired level of profit that must be adhered to, the profit goal can be interpreted as a fixed cost
This method can also be known as cost-plus pricing
Formula:
Price = Total Fixed Costs + Total Variable Costs + Projected Profit
Quantity Produced

4. Cost Based Pricing: Full-Cost
A manufacturer of colour television has a fixed cost of $100,000 and a variable cost of $300 for every unit produced. The profit objective is to achieve $10,000 based on 150 televisions. What is the selling price?
Formula:
Price = Total Fixed Costs + Total Variable Costs + Projected Profit
Quantity Produced
=100,000 + ($300 x 150) +$10,000
150
= $
= $

5. Cost based pricing: target pricing
Target Pricing is designed to generate a desirable rate of return on investment (ROI) and is based on the full costs of producing a product
For this method to be effective, the firm must have the ability to sell as much as it produces
The major drawback of this method is that demand is not considered
If the quantity produced is not sold at the target price, the objective of the strategy, to achieve a desired level of ROI, is defeated
Formula:
Price = Investment Costs x Target Return on Investment %
Standard Volume
+ Average Total Costs (as Standard Volume/Unit)

6. Cost based pricing: target pricing
A manufacturer has just built a new plant at a cost of $ The target return on the investment is 10%. The standard volume of production for the year is estimated at units. The average total cost for each unit is $5000 based on the standard volume of units. What is the selling price?
Formula:
Price = Investment Costs x Target Return on Investment %
Standard Volume
+ Average Total Costs (as Standard Volume/Unit)
= $ x $5000
15 000
= $5500

7. Cost based pricing: Break-even analysis
Break even analysis has a greater emphasis on sales than do the other methods, and it allows a firm to assess profit at alternative price level
Break even analysis determines the sales in units or dollars that are necessary for total revenue (price x quantity) to equal total costs (fixed plus variable costs) at a certain price.
The concept is simple, if sales are above the break-even point (BEP) the firm yields a profit, if the sales are below the BEP, a loss results
Formula:
Break Even in Units = Total Fixed Costs
Prices – Variable Costs Per Unit
Break Even in Dollars = Total Fixed Costs
Variable Cost (Per Unit)
Price

8. Cost based pricing: Break-even analysis
A manufacturer incurs total fixed costs of $ Variable costs are $0.20 per unit. The product sells for $0.80. What is the break-even point in unit? In dollars?
Formula:
Break Even in Units = $
$0.80 – $0.20 =
Break Even in Dollars = $180,000
$0.20
$0.80
= $

9. Demand-based pricing
As the name suggests, the price that customers will pay influences the demand based pricing the most
In determining price, then, a company can proceed in two directions.
Chain Mark Up/Forward Pricing
To establish all costs and profit expectations at the point of the manufacture, adding appropriate profit margins for various distributors, thus arriving at a retail selling price that hopefully is in line with customer expectations
Demand Minus Pricing/Backwards Pricing
To determine what a consumer will pay at retail and then aim to manufacture a product that is below that price and gives a significant or desired profit

10. Demand-based pricing Chain Mark Up/Forward Pricing
A CD distributor has determined people are willing to spend $30 for a three cd set of Lil Yacthy. The company estimates that marketing expenses and profits will be 40% of the selling price. How much can the firm spend on producing these CDs?
Product Cost = Price x [(100-Markup %)/100]
= $30 x [(100-40)/100]
= $30 x (60/100)
= $18

11. Demand-based pricing Demand Minus Pricing/Backwards Pricing
A manufacture of blue jeans has determined their total costs are $20 per pair of jeans. The company sells the jeans through the wholesalers who in turn sells jeans to retailers. The wholesaler requires a markup of 20% and the retailer requires a mark up of 40%. The manufacturer needs a mark up of 25%. What price will everyone pay?
Manufacturer Cost and Selling Price = $ % Markup
= $20 + $5
= $25
Wholesaler’s Cost and Selling Price = Manuf. Selling Price + 20% Markup
= $25 + $5
= $30
Retailer’s Cost and Selling Price = Wholes. Selling Price + 40%
= $30+$12
=$42

12. Competitive bidding
Involves two or more firms submitting a purchaser written price quotations based on specifications established by a purchaser
Due to dynamics of competitive bidding and the size, resources, and objectives of potential bidders, it is difficult to explain how costs and price quotations are arrived at
Example: Construction
Some companies may want big profit while others might want to use break even analysis
Goal is to cover all their total and variable costs and add a small profit (large enough to make it worth it, small enough to win bid)