Enumerate the different Pricing Policies

Pricing Policies:
The discussion of pricing is very important in any business. Price once fixed is never permanent. It needs to be reviewed and revised according to the market conditions.

Different Pricing Policies by firm:
Every firm has its own pricing practice, depending on the nature of its product, demand , utility of its product, taxes etc. Now under this topic, we will discuss some main pricing practices –

1. Cost-Plus pricing:-
After taking into account the cost per unit and profit margin, cost-plus is fixed. In this method, the firm will consider average fixed cost and estimate the average variable cost after that a certain mark up has to be taken in terms of profit percentage. This is called profit margin; this is with regard to Total cost. Here, the fixed costs are land, capital invested in machinery and other fixed costs and variable cost include rent, wages, bills of material etc. the most difficult is deciding on the profit margin. New firm entering in the industry will imitate the existing firm and get information of profit margin from the competitor. But one with new product has to use his judgment according to market conditions and potential demand. The commodities requiring huge investment will fix high profit margins Eg. Television, Air-Conditioners, Cars etc (Sometime have 25% of total cost), whereas commodities with simpler techniques and small investment stick to low profit margins.

This pricing practice has its limitations:
• It ignores demand side of market and has no consideration for fluctuation in demand and needs to change the price.
• It fails to show the force of competition in market.

2. Going – rate pricing:-
This is opposite to the cost-plus pricing; it suggests fixing price according to the existing price of similar product in market. This firm adjusts its own price according to the general price structure. This is safest way; here price leadership fits better. But one should not confuse it with perfect competition because in Perfect Competition, the firms are price takers and they have no choice of determining price; where as, in going rate pricing, the firm can charge higher than its competitors in prosperity and lower than them in depression; which means they can change the price according to the market situations. This kind of practice is followed not only by small firms but also by big firms. It is time saving and convenient.


3. Imitative Pricing:-
It is similar to going rate pricing. The firm imitates the price of leading firm. In oligopolistic situation, the firm which joins later imitates the leader. There is a price leader. And price followers who the price fixed by price leader. This is also a simple and convenient way of pricing.

4. Marginal Cost Pricing:-
It is a common practice, it is based on a pure economic concept of equilibrium of the firm, where marginal cost is equal to marginal revenue. This pricing practice is based on the belief that if Marginal revenue. This pricing practice is based on the belief that if Marginal Revenue covers Marginal cost, the normal profit will always be there. This also has its own limitations. The accounts and calculation of Marginal cost and Marginal revenue should be done accurately. If the data in not available, the firm avoids such type of practice.