Pricing Flashcards
Total sales revenue vs addition to total revenue
Example-1:
A firm’s pricing of a product is as under:
20 units @ ~4.00 per unit.
21 units @ 0.90 per unit.
22 units @ ~3.80 per unit.
The sales figures can be summarised as below;
Qt Price Total sales revenue Addition to total revenue
20 4.00 80 –
21 3.90 81.90 1.90
22 3.80 83.60 1.70
What is rate of return pricing
IRR=NPV zero=a zero NPV means that the investment earns a rate of return equal to the discount rate
If you discount the cash flows using a 15% real rate and produce a $0 NPV, then the analysis indicates your investment would earn a 15% real rate of return.
- Calculate annual cash flow stream
- discount with AF factor (for relevant investment years). this will give PV of recurring annual CFs
- Add investment at T0
- (2+3) will give total outlay of investment
- divide 4/AF to get annual In CFs (revenue) each year
- divide 5 by no of units to get price per unit
What is Pricing Model - based upon economic theory of prices
New Product
Three Categories
Revolutionary
Evolutionary
Me-too
Revolutionary- Premium price
Evolutionary - 1. Cost-benifit, 2. demand, 3. competitor
Me-too - Price takers——price determined by competitive forces
CALCULATE CONTRIBUTION AT DIFFERENT DEMAND LEVELS AND SELECT THE PRICE WITH HIGHEST CONTRIBUTION
Finished Goods Pricing Methods
Full Cost (@current output & wage level) Plus [To maintain fixed capital intact; by including depreciation]
Rate of Return - Allowing the industry to earn adequate return on CE would attract additional capital & investment
Variable cost pricing - Due to limitations of total cost method like Allocation of inter-departmental overheads is arbitrary;estimation of normal output can npt be done precisely
Competitive pricing
Incremental Pricing
Finished Goods Pricing Methods - Cost Plus
Cost Plus Example
Rate of return pricing
Variable Cost Pricing
Variable Cost Pricing-Example
Competitive Pricing
Incremental Pricing
Points that show how this technique gives consideration to all repurcussions of a decision
Incremental Pricing-Example
Importance of Pricing
Most Crucial & Difficult decision
Long Term suvival of profit oreinted firm
Accounting info imp. as sometimes cost+profit
Pricing decisions=>>>Org Goals>may be max. profit/sales/optimal utilization of resources.
Pricing Theory
- Basic & other Assumption?
- Theory
- Assumptions
- Profit maximization-main objective of firm
- Demand factor
- cost factor
- one product
- Demand effect will cause reduction in price—-in other words to increase sales price has to be decreased, therefore rate of increase in revenue drops while cost keeps on increasing due to difficulty in expanding with current resources, resultantly revenue curve drops while cost increase; optimal level is where MR=MC; if MR>MC firms will contnue producing, if MR<mc></mc>
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How to determine price with using price theory
- Use price equation to derive total revenue equation
P=a-bq
- Revenue Eq; Pxq
PxQ=aq-bq2
Derivative
Revenue=a-2bq
- determine q (demnand) from MC=MR equation where MC=variable cost
- Put q in price eq again to determine price
Role of capacity utilization in Pricing
