Pricing: Objectives, Methods, Strategies and Discounts
Pricing objectives, methods, strategies and discounts are tested here. Numerical questions on cost-plus pricing and mark-up versus margin are common, along with legal limits on predatory pricing.
Core rules
- Objectives: survival, profit maximisation, target return, sales growth, market share, quality leadership and status quo.
- Methods: cost-plus (cost plus mark-up), target-return, perceived-value, value pricing, going-rate and sealed-bid.
- Strategies: skimming (high initial price), penetration (low initial price), product-line pricing, optional-product, bundling, psychological pricing and promotional pricing.
- Discounts: cash, trade, quantity, seasonal and allowance. A discount reduces net realisation; check whether volume gain covers it.
- Predatory pricing below cost to eliminate rivals is restricted under the Competition Act, 2002.
Worked example
A bulb has variable cost Rs 60, fixed cost allocation Rs 20 and a desired mark-up of 20% on total cost. Price = (60 + 20) x 1.20 = Rs 96. If a retailer gets a 10% trade discount, the firm realises Rs 86.40. Reasoning: the mark-up is on cost, not on selling price. A 20% margin on price would give a different answer, so read the wording. If competitors sell at Rs 80, the firm must justify the premium through longer life or warranty, not simply insist on Rs 96.
Traps
Mark-up on cost is not margin on price. Do not call penetration pricing predatory without evidence of below-cost intent. Do not ignore the effect of discounts on contribution. Do not use skimming when buyers are price-sensitive and rivals can enter quickly.