Cost based pricing, Marketing Management

Cost Based Pricing: Under the cost based pricing, different methods used are :-

  •   Mark Up Pricing
  •   Absorption Cost Pricing
  •   Target Rate of Return Pricing
  •   Marginal Cost Pricing

Mark Up Pricing : It refers to the pricing methods that involve the selling price of the  product is fixed by adding a margin to its cost price. The mark ups can vary depending on the nature of the product and the market. Generally, the higher the value of the product, the larger is the mark up. And if the slower the turnaround of the product, the higher is the mark up. Mark-up pricing proceeds on the supposition that demand cannot be known precisely, but costs are known.

Absorption Cost Pricing: ACP rests on the predictable unit cost of the product at the regular level of production and sales. The method  which is uses standard costing techniques and works out the variable and fixed costs involved in manufacturing, administering  and selling the product.  By adding the costs of three operations, we get the entire costs. The selling price of the product is arrived by adding the needed margin towards profit to such total costs. The major merit of this method is that as long as the market may absorb the production at the determined price, the firm is guaranteed of its profits without any risk and the major demerit is that the method simply suppose price to be a function of cost alone and this method becomes ineffective.

Target Rate of Return Pricing: this is similar to absorption cost pricing. The rate of return pricing is utilized in rational approach to arrive at the mark up. It is arrived in such a way in which ROI criteria of the firm are met in the procedure. But this process amounts to an improvement over absorption pricing since it uses a rational basis for arriving at the mark up. Secondly, since the rate of return on the funds employed is a function of mark up and also turnaround of capital employed, rate of return costing constantly reminds the firm that there are two routes for profits- first improvement in the capital turnover & second increase in the mark up. The main restriction of the method is that the rate of return is connected to the level of production & sales assumed.

Marginal Cost Pricing: It aims at maximizing the involvement towards the fixed costs. Marginal costs contain all the direct variable expenses of the product. These direct variable costs are fully realized in marginal cost pricing,. In addition to it, a portion of the fixed costs is also realized under competitive market conditions marginal cost pricing is more useful. Moreover,  when  a  firm  has  a  number  of  product  lines  marginal  cost pricing is helpful. This method is also useful in quoting for competitive tenders and in export marketing.

On the demerits side, marginal costing makes definite assumptions, regarding cost and revenue behaviors which can turn out to be wrong in some cases. Moreover, whereas marginal costing rests on a twofold classification of cost into fixed costs and variable costs, in reality there may be a third class of costs - The Semi variable costs.

Posted Date: 10/15/2012 4:32:37 AM | Location : United States

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