PRICING POLICIES

Pricing is the source of revenue which every firm is trying to maximize. It is also one of the most important tools in the hands of a firm which it can use to expand its market share.. The pricing of a product is important because if the firm prices its products very high then it may lose its customers to the competitors. On the other hand if it keeps its prices very low it may not be able to make the profits required to keep the business going. Whether to keep the price high or low depends upon a lot of conditions. It is also necessary that the pricing be reviewed from time to time because no firm works in isolation and the activities of the competitors and the business environmental conditions also influence the working of a firm. The factors governing the pricing policies of a firm can be A) Internal Factors : These are 1. the costs 2. management policies B) External Factors 1. 2. 3. 4. Elasticity of supply and demand goodwill of the company competition in the market and the trend in the market the purchasing power of the buyers

CONSIDERATIONS FOR FORMULATING THE PRICE POLICY 1. Objective of the Firm: The fundamental goals of the company are the main guide for formulating the pricing policy. One of the fundamental goals is the survival of the firm. This broad objective of survival or continued existence of the firm can be achieved by having an objective related to growth, market share, profits or maintenance and control of ownership of the firm. 2. Nature of competition in which the company is operating: the nature of competition in which the company is operating will have a great influence on the type of pricing policy the company follows. For example if the company is operating in a perfect competition, then the company has no control over the pricing. If it is operating in an oligopoly, then it has to consider the pricing of the competitors as well. Today, in this competitive environment, companies to satisfy the wants and desires of the customers.

3. Product and Promotional Policies: a products pricing must be viewed together with the promotional strategies of the company. Sometimes in order to increase the sales, companies reduce the prices. But before reducing the prices, it must be ensured that the reason for not getting good sales is prices only. Sometimes, due to wrong promotional strategies also sales suffer. In such a situation, reduction in prices will not bring about the desired results. 4. Nature of Price Sensitivity: Very often undue importance is given to price sensitivity of a product. But the many factors which can reduce this price sensitivity are ignored. For example, an effective marketing strategy can greatly reduce price sensitivity and allow the firm to charge a higher price. 5. Conflicting Interests of Manufacturer and Middlemen: The distribution channel which is responsible for delivering the product to the customer is made up of many middlemen. These middlemen work for some monitory benefit. Sometimes, there is a conflict in the interest of the manufacturer and the middlemen. The manufacturer may want the middleman to work at a lower margin than what is prescribed resulting in a conflict between them. 6. Active entry of non business Groups into the determination of Prices: Sometimes the government may intervene in the pricing process to protect the interests of the citizens. This has its effects on the pricing decisions of a firm.

PRICING METHODS

The various methods usually employed by the firms are as follows A) COST ORIENTED METHODS 1. Cost plus or full cost pricing 2. Target pricing or pricing for a rate of return 3. Marginal cost pricing B) COMPETITION ORIENTED PRICING 1. Going rate pricing 2. Customary Prices 3. Sealed bid pricing

COST PLUS PRICING Under this method the price is fixed to cover all costs (material, labour and overheads) and a pre determined percentage of profits. The percentage of profits differs from industry to industry and also depends upon the nature of competition in the industry. In the event of a oligopoly, the percentage of profit may also be decided by the trade association. The profit margins may also be fixed by the government in case of some products like life saving drugs. Limitations of Cost Plus Pricing method 1. It ignores demand. It does not take into consideration what people are willing to pay for the product. 2. It does not give the correct picture of the forces of competition in the industry. 3. Any method of allocating the overheads to a particular product is arbitrary. This is particularly so in a multiproduct company. In spite of the above shortcomings, the cost plus pricing method is widely used. Some of the reasons for its popularity are as follows 1. This method enables a fair and plausible pricing with ease and speed no matter how many product the company handles. 2. Prices based on this method look factual and precise and thus seem morally correct. 3. This method is used where cost of getting information is too high and the process of trial and error is costly. Firms use this method in times of uncertainties. 4. When firms are uncertain about the shape of their demand curve and are not sure about the response to price changes, firms normally stick to this type of pricing method. 5. It is difficult to identify and compute direct costs. 6. This type of pricing method covers fixed costs in the short run also and the firms feel that if the fixed costs are covered in the short run, they will be covered in the long run as well. 7. When products and production processes are similar, it is not known how the rival firms will react to the price. In such a situation, this method gives a pricing that is acceptable to all the firms. Hence all the firms to be on the safer side stick to this type of pricing. 8. This type of pricing takes into account the product costs and management tends to know more about product costs than any other factors which are relevant to pricing.

PRICING FOR A RATE OF RETURN Under this method of pricing, the firm decides a rate of return it considers satisfactory and then sets the price that will allow them to earn that rate of return when their plant is operating at a standard rate. In other words, the firm decides standard costs at standard volumes and adds the margin that will give the targeted rate of return. In this way, pricing for a rate of return is a variant of the cost plus pricing method. .

MARGINAL COST PRICING Unlike the full cost pricing which is based on total cost comprising of the fixed and variable costs, the marginal cost pricing is on variable cost only. It is clear therefore that whereas the full cost pricing is a long term phenomenon, the marginal cost pricing is a short term phenomenon. This type of pricing is based on the incremental cost of production and the firms try to analyse the increase in cost as a result of some significant amount of change in the output. The firm uses only those costs that are directly attributable to the output of a specific product.. We know that in a competitive market situation in the short run a firm will shut down only if the price is below the aaverage variable cost, while in the long run the firm must cover its average total cost i.e average variable cost plus the average fixed costs. Thus in the case of marginal cost pricing there is a guarantee that the firm does not shut down , but since it does not cover the fixed costs, it does not guarantee that the firm will operate at the break even point. This pricing procedure is often adopted when the firm a) b) c) d) e) Wants to introduce its products to new markets faces stiff competition in the market has unutilized capacity when a foreign market is to be tapped to earn foreign exchange when the firm has already purchased large quantities of raw materials f) when employees cannot be retrenched g) when goods are of perishable nature.

Advantages of Marginal Cost Pricing 1. It allows the firm to develop a far more aggressive pricing policy than does the cost plus pricing. 2. It is quite useful for pricing over the life cycle of the product. Limitations of Marginal Cost Pricing 1. It helps in short period pricing and can therefore be applied successfully on a temperory basis. It does not provide a long term stable pricing policy. 2. It does not guarantee that the firm will operate at the break even point. 3. During recession, some firms may resort to marginal cost pricing which may be followed by other rival firms thus leading to cut throat competition.

GOING RATE PRICING In this type of pricing, the emphasis is on the market rather than the cost. Where costs are particularly difficult to measure, the firm adjusts its its own price to the general price structure in the industry. This type of pricing reflects the collective wisdom of the industry. It is also a safe way of pricing because where price leadership is well established, it is safe to charge according to what the competitors are pricing.

CUSTOMARY PRICING Prices of certain goods become more or less fixed as a result of their having prevailed for a considerable period of time. For such goods, if there is a change in the costs, the quality or quantity is adjusted to accommodate the change in costs.. Only if there is a substantial change in the costs, the prices are changed.. As far as possible the existing prices are maintained .

SEALED BID PRICING This type of pricing is more prevalent in construction activities or in the disposal of used products or in the sale of antique pieces or artifacts. Here the prospective buyers are

asked to quote their prices in sealed covers and the covers are opened at a pre determined place and time in the presence of all the bidders. The buyer who quotes the highest is awarded the contract.

TRANSFER OF TECHNOLOGY

Technology transfer is the process by which commercial technology is disseminated. Technology is an important ingredient for development. While the developed countries have rich stock of technology and fast technological progress, the underdeveloped or developing countries are technologically backward and have a slow pace of technological progress. Therefore in order to speed up the process of development of the developing countries, it is necessary to transfer technology from the developed countries to the developing countries.

Types of Technology Transfer

1. The assignment , sale and licensing of all forms of industrial property except for trade marks, service marks and trade names. 2. The provision of know-how and technical expertise in the form of diagrams, plans, models, instructions, guides, formulae, detailed engineering designs, specifications and equipment for training etc. 3. The provision of technological knowledge necessary for installation , operation and functioning of plant. 4. The provision of technological knowledge necessary to acquire , install and use machinery and equipment.

Forms of Technology Transfer

There are two types of technology transfer internalized and externalized. Internalized forms are investment associated where control resides with the technology transferor. Externalized forms refer to all other forms such as joint ventures with local control, licensing strategic alliances. The main distinguishing feature between the two is that in internalized TT, the transferor has a continuing financial stake in the entity, allows it to use its brand names and to have access to its global technology and marketing networks. The transferor sees the entity as an integral part of its global strategy.

Levels of TT
There are four levels of TT a) Operational Level: These are the simplest of TT which are needed for operating a given plant like basic manufacturing skills, quality control, and maintenance and procurement skills. b) Duplicative Level: These include the investment capabilities needed to expand capacity and to purchase and integrate foreign technologies. c) Adaptive Level: At this level of TT, imported technologies are adapted and improved and design skills for more complex engineering learned. d) Innovative Level: At this level innovative skills are based on formal R&D that are needed to keep pace with technological frontiers or to generate new technologies.

Channels of Technology Flow:

The most important channels of flow of technology are :Foreign Investment: When multinational corporations make investments in foreign countries, particularly the developing countries, it is in the form of transfer of technology. The multinationals make investments in the foreifn countries to utilize resources like cheap labour and development of foreign markets. Technology License Agreements and Joint Ventures: Technology Transfer takes place on a significant scale through licensing agreements and joint ventures. When there are restrictions on foreign investments, joint ventures are formed between a local company and a foreign company paving the way for transfer of technology. When the foreign company is allowed only a minority stake (i.e. less than 50% participation ) technological agreements assume great importance.

Methods of Technology Transfer

The method of technology transfer largely depends upon the type, nature and extent of technological assistance required. The following are the important methods:-

Training or Employment of Technical Expert: Where the manufacturing processes or techniques are simple, technology can be transferred by training suitable personnel or by employing foreign technical expert. Contracts for Supply of Machinery and Equipment: This type of technology transfer takes place where the nature of technology required is not complex. In this, when machinery is imported, contracts are entered into which provide for transfer of operational technology pertaining to the machinery imported. Licensing Agreements: This type of transfer generally takes place when foreign direct investment is not possible or desirable. In this , the authorizing country enters into an agreement with a licensee in another country to use the technical expertise of the company which is transferring the technology. Turnkey Contracts: This type of transfer takes place when the technology is complex. The turnkey project contracts include the supply of such services as design, creation, commissioning or supervision of a system or a facility to the client, apart from the transfer of goods.

Issues in Transfer of Technology

The four important issues associated with the transfer of technology are :1. Cost: In many cases the technology is imported at an unreasonably high cost.Also in a number of cases where foreign direct investment with technology transfer, the net outflow in terms of dividends, royalties, interests etc are much higher than the corresponding inflow. 1. Appropriateness: It has been found that the foreign technology transfer is not relevant or appropriate to the recipient countrys socio economic priorities and conditions. For example, a country like Ethiopia, which is starving, has no use for the transfer of nuclear technology. 2. Dependence: Heavy reliance on foreign technology may lead to technological dependence. In such an event, the traditional, indigenous technology of a country tends to be ignored and no further development takes place in the traditional technology. It creates an attitude of subservient dependence and inhibits the capacity to do even minor adaptive research in the processes developed locally. A good example is that of the Jute industry. With the introduction of new materials

and technologies in the woven sacks industry, the jute industry was neglected resulting in its downfall. 3. Obsolescence: It has been observed that there is a tendency to transfer outdated technology to the developing countries. Thus they would not enjoy the benefits of latest technology and still lag behind.