Pricing Decision

Importance of Pricing Strategy

• Pricing is crucial in competitive markets.
• Aggressive pricing boosts sales but may lower profitability.
• Pricing strategy depends on:
  • Market conditions
  • Nature of order/customer
  • Cost structure

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Role of Marginal Costing in Pricing

• Pricing today is complex and competitive.
• Market determines price, but internal pricing still plays a role.
• Internal Price = Cost + Desired Profit
  • It’s the minimum acceptable price.

🔸 Price should always cover at least the variable cost.
🔸 Selling below variable cost is allowed only for short-term or strategic reasons.

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Export Market and Special Order Pricing

• Companies may enter export markets using marginal cost-based pricing.
• Since fixed costs are already covered, pricing is based on variable costs.
• Strategic pricing below internal price can help gain market entry.

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Tata Motors Example: New Nano Variant

Assumptions:

• Sales Target: 50,000 units/year
• Investment: ₹500 Cr. in plant/machinery
• Variable Cost per unit: ₹1.40 Lakhs
• Fixed Cost (Incremental): ₹60 Cr.
• Fixed Cost per unit: ₹12,000 (₹60 Cr. / 50,000 units)

Price Range Suggested: ₹1.70 Lakhs and above

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Profitability at Different Prices (Using Marginal Costing)

• Contribution = Selling Price - Variable Cost
• Profit = Total Contribution - Fixed Cost
• ROI = Profit / Investment

Selling Price	Contribution	ROI
₹1.70 Lakhs	₹30,000	18%
₹1.72 Lakhs	₹32,000	20% (min required)
₹1.78 Lakhs	₹38,000	38%

🔸 Minimum price to meet 20% ROI = ₹1.72 Lakhs
Composition: ₹1.40L (VC) + ₹12K (FC) + ₹20K (Profit)

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Special Order Pricing Example

Scenario:

• A national taxi service orders 5000 cars
• Retail price: ₹1.80 Lakhs
• Variable Cost: ₹1.40 Lakhs
• Fixed cost is already recovered from retail sales

Hence, for this special order, only variable cost matters.

🔸 Normal Order vs Special Order:

Type	VC	FC	Profit Margin	Price
Normal Order	₹1.40L	₹12K	₹28K (18.42%)	₹1.80 Lakhs
Special Order	₹1.40L	₹0	18.42% of ₹1.40L	₹1.65788L

Special Order Price Computation:

Price = Variable Cost + (Normal Profit Mark-up % × Variable Cost)
      = ₹1,40,000 + (18.42% of ₹1,40,000)
      = ₹1,65,788

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Special Order Authority & Controls

• Delegation of pricing power for special orders must be carefully assigned.
• Risks:
  • Marketing team may classify normal orders as special to meet sales targets.
• Independent authority should verify order classification.

Delegation Framework:

1. Marketing can recommend special order pricing using VC + standard markup.
2. If further discount is negotiated → escalate to next-level authority.
3. In strategic cases, profit mark-up may be compromised.

✅ Establish clear rules for discounting & special pricing
✅ Protect profit margins through controlled delegation

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