Objectives of Pricing Policy:
Formulation of pricing policy begins with the classification of the basic objectives of the firm. Pricing objectives have to be in line with the overall objectives of the organization. In most of the situation, profit maximization is the primary objective of the pricing policy, but it is only one objective. The following are the other objectives of pricing policy in an organization:
- Pricing the goods based on reasonable fixed and variable costs.
- Increase the market share at the expense of immediate profits.
- Avoid adverse channel partners reaction to charging high prices and proper reasoning should be furnished for their satisfaction.
- Ethical consideration is not to reap abnormal profit.
- Immediate survival of the firm.
- Charge reasonable prices so as to have good relations with the government and the public at large.
- Maximization of the manufacturer’s goodwill rather than only profit-motive.
- To safeguard the organization against tough competition. Although its importance varies from firm to firm, pricing is one of the tools that a firm has at its disposal in its attempt to reach the stated objectives.
Benefits of Pricing:
Intelligent pricing is one of the most important elements of any successful business organization. We must understand the market, distribution costs, and competition. The marketplace responds instantly to technological advances and competition. We must keep track of the factors that affect pricing and be ready to adjust quickly according to the market.
There are three primary cost factors that need to be considered by businesses when determining the prices that they charge for their goods or services. A company may be able to command a hefty price for an item, only to find that the various costs of producing and delivering that item eliminate most or all of the profit that it realizes on the sale.
Labor costs consist of the cost of the work that goes into the manufacturing of a product or the execution of a service. Direct labor costs can be figured by multiplying the cost of labor per hour by the number of man-hours required to complete the job. The manufacturers need to keep in mind that the “cost of labor per hour” includes not only the hourly wage or salary of the relevant employees but also the costs of the fringe benefits that those workers receive from the organization. These fringe benefits can include social security, retirement benefits, insurance, unemployment compensation, workers’ compensation, and other benefits.
Material costs are the costs of all materials that are part of the final product offered by the business organization. As with labor, this expense can apply to both goods and services. In the case of goods, material costs refer to the costs of the various components that make up a product, while material costs associated with services rendered typically include replacement parts, building parts, etc.
Overhead costs are costs that cannot be directly attributed to one particular product or service. Some business consultants simply refer to overhead costs as those business expenses that do not qualify as labor costs or material costs. These costs include indirect expenses such as general supplies, heating and lighting expenditures, depreciation, taxes, advertising, rental or leasing costs, transportation, damaged products, and insurance. A certain percentage of employees usually fit in this category as well.
Overhead expenses are typically divided into two categories-fixed expenses and variable expenses. Fixed expenses are regular (usually monthly) expenses that will not change much, regardless of a company’s business fortunes. Variable expenses are those expenses that undergo greater fluctuation, depending on variables such as time of year (for seasonal businesses), competitor advertising, and sales.
One of the most important tools that the business organizations use to measure the health of businesses is the “cost of goods sold.” Freight charges are typically included within this equation. The cost of goods sold provides the business organizations with a rough estimate of their gross profit margin. Business Organizations have many different pricing strategies from which they can choose, but they need to select carefully depending on the market dynamics.
Cost-plus pricing is the general method adopted by any organization which involves adding together all labor, material, and overhead costs (the “cost”) and then adding the desired profit (the “plus”).
Competitive pricing is the method of choosing their own prices on the prices of their principal competitors. Business organizations that adopt this method of pricing must ensure that they are looking at the equivalent competitors in the same line of cement manufacturing units.
The key benefits of pricing are as follows:
- Reasonable pricing will reap reasonable profits for the business organization which can be utilized for modernization of the cement plant, capacity expansion, technology up-gradation, etc.,
- The profit margin earned by a cement manufacturer will provide the required support like discounts, and advertisement supports to their dealers, sub-dealers, and the influencers segment.
- Employees will earn a better salary, performance incentives, and other better perquisites from the business organization if the prices are fixed at an optimum or premium level.
- Generally, the brand image of the product will definitely be on a higher scale if the cement brand commands a premium price in the market.
- Additional infrastructure facilities can be provided by the business organization for the welfare of the employees and the dealers’ segment which will be a motivating factor for yielding better results for the organization in the long run.
For citing this article use:
- M.P.SRIRAM. (n.d.). A STUDY ON FACTORS INFLUENCING PRICING OF CEMENT A STUDY WITH SPECIAL REFERENCE TO TAMILNADU.
