| UNIT 6: PRICING PRICING OR PRICE? Price Price is the value that is placed on something. Price is any common currency of value to both buyer and seller. Price directly generates the revenues, serves as a communicator, a bargaining tool and a competitive weapon. Pricing Is the manual or automatic process of applying prices to purchase and sales orders. Depends on: Production costs Distribution costs Demand level Competitors’ current or potential prices Pricing Also depends on company’s consideration of: Their overall objectives Their consequent profit or sales targets (: maximum revenue, maximum market share) Market positioning (Prestige pricing: quality products cannot be sold if their price is thought to be too low) Up or Down A large inventory, a fall in market share often lead to a cut in prices. Cost inflation, urgent need of cash often lead to a rise in prices. Demand that exceeds its possibility to supply also likely leads to a rise in prices. Elastic or Inelastic When sales respond directly to price variations, demand is said to be elastic. If sales remain stable after a change in price, demand is inelastic. Psychological Effects of Price Price cuts: Buyers believe that the product is faulty or of lower quality, or will soon be replaced, or that the firm is going bankruptcy. Price rises: Convince some customers that the product must be of high quality, or will soon become very hard to get hold of. Total costs include: Operating and Servicing costs Respond to competitor’s price cut by: Improving product / service Improving Communications Reciprocal cut may: Lead to a price war, good for customers A product’s selling price generally represents: Its total cost (unit cost plus overheads), & Profit or “risk reward” Overheads: are various expenses of operating a plant cannot be charged to any one product, process, or department have to be added to prime cost or direct cost which covers material and labour. Cost accountants .