Question

1. Your mother operates a small restaurant but has limited knowledge of how to arrive at a selling price that would cover her cost and yield a desired profit. Based on your knowledge of calculating menu selling prices; you have decided to assist your mother with a strategy that would effectively cover her cost and earn a profit which is in line with her objectives of achieving 40% profit at the end of the year. You are required to

1. Discuss appropriate pricing approaches outlining their respective advantages and disadvantages.
2. Recommend an approach to your mother. Give 5 reasons for your selection.

  

Answer 1

Ans a:- Pricing approaches :- Pricing approaches includes 3 main approaches which are used to determine the price of a particular product. These are:-

1. Cost based pricing

2. Demand based pricing

3. Competition based pricing

1. Cost based pricing:- Under this pricing approaches the prices are set in order to cover the production cost with the profit margin.  Cost based pricing = Manufacturing cost + % of profits ( profit margin)

Advantages:-  

• It is easy to calculate
• Old, common and simplest method to decide the price of product

Disadvantages:-

• It does not consider the market
• It does not consider the customers’ demands and buying trends

2. Demand based pricing :- It is also known as customer based pricing. The pricing is done according to the value perceived by the customers.

Advantages :-

• The pricing is done according to the needs of customers.

Disadvantages :-

• It involves estimation of customer’s perception while setting the prices which can prove to be wrong sometimes.
• Ignores production cost and competition.

3. Competition based pricing :- Under this method the prices of their products or services on the basis of the prices of their competitors.

Advantages :-

• It is a dynamic pricing method
• It improves profit margin.

Disadvantages :-

• It ignores market demand and cost of the product.
• Chances of loss due to fluctuations in prices of competitors.

Ans b:- In this situation the cost based approach is recommended because of the following reasons:-

1.      Cost-based pricing uses manufacturing or production costs as its basis for pricing.

2.   As the mother does not have the perfect knowledge of market so in this case other 2 methods are not suitable.

3. In this case the main aim is to cover the cost and earn profits so cost based is recommended.

4. This method is suitable where it is not possible to gather market information for the product and it is also a cheap method.

5. This method is suitable for small level business.