Basic Methods of Price Determination Following Points Must Be Taken Into Consideration Before Fixing the Price of a Product. Costs Competition Demand Legal Considerations Elements of Marketing Mix Etc. However, Major

1978 Words Aug 22nd, 2013 8 Pages
Basic methods of price determination

Following points must be taken into consideration before fixing the price of a product.

Legal Considerations
Elements of Marketing Mix etc.

However, major determinants of price are - Costs, competition and demand. Based on this there are three major approaches to setting the price of a product. They are:

1. Cost oriented pricing
2. Competition oriented pricing
3. Demand oriented pricing

Cost oriented pricing

In Cost oriented approach to pricing or cost based pricing the selling price of a product is determined by adding a percentage of profit to the product cost. There are two methods in cost oriented pricing. They are

1. Cost plus pricing and
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Average variable cost per shoe is $8 then the break even point is

12 - 8

= 200 shoes.

The firm must sell at lease 200 shoes to break even i.e. total revenue to the total cost. To find out the revenue or sale value you can multiply the number of shoes into selling cost ie. 200 x 12 = $2400. If the firm has to make $400 profit, it has to sell 300 shoes (Total revenue = 300 x 12 = $ 3600)

If the firm increase the price of the product to $13 then the break even point will be 160 shoes. And if it reduce the price to $11 the the break even point will be 266 shoes.

For pricing decisions and financial analysis, this technique is very useful. Marketing manager can ascertain the financial implication of pricing decision by using this technique. It is useful when the demand and coast of production are stable. For fixing up the price of a new product, this method is very useful. The firm must consider different price level to earn the desired profit. Possible sale volume also must be taken in to consideration while fixing the price.

To some products the fixed cost will be same for different volume of production. But to some other products, the fixed cost may increase as the volume increases. In such causes, this technique is useless. Other limitation is that the company cannot predict the sale volume of the product in advance. Lower level of production or sales may occur in adverse conditions.

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