PRICING METHODS AND PRICE TRENDS

Transcription

1 PRICING METHODS AND PRICE TRENDS Pricing is an important element of the marketing mix. It can be used as a strategic marketing variable to meet competition. It is also a direct source of revenue for the firm. Hence, to get the maximum possible benefit of pricing various pricing method must be considered while working on the pricing policy for any product. Well here we are going to discuss the alternative pricing methods which are most commonly used. These methods are as follows:- 1. COST-PLUS OR FULL COST PRICING. 2. PRICING FOR A RATE OF RETURN OR TARGET PRICING. 3. MARGINAL COST PRICING. 4. GOING RATE PRICING. 5. CUSTOMARY PRICING. 6. MARKET PLUS PRICING. 1. COST PLUS OR FULL COST PRICING This is most common method used in pricing. Under this method, the price is set to cover cost (material, labour and overheads) and a predetermined percentage for profit. The percentage of profit differs, striking among industries, among member firms and even among different products of the same firm.

2 This may reflect differences in competitive intensity, different in cost base and differences in the rate of turnover and risk. In fact it denotes some vague notion of just profile. What determines the normal profit? It is a Burning question! Ordinarily margins charged are highly sensitive to the market situation. They may; however tend to be inflexible in the following cases. (i) The may become merely a matter of common practice. (ii) Mark ups may be determined by trade associations either by means of advisory price lists or by actual lists of markups distributed to members. (iii) Profit fixed under price control; as the maximum profit margins remain the same even after the price control in discontinued. A clear explanation cannot be given for the widespread use of full-cost pricing, as firms vary greatly in size, product characteristics and product range, and face varying degrees of competition in the markets for their products. However, the following points may explain its popularity. (i) In practice, firms are uncertain about the shape of their demand curve and about the probable response to any price change. This makes it too risky to move away from full cost pricing. (ii) Price based on full cost look factual and precise and may be more defensible on moral ground then prices established by other means.

3 (iii) Firms preferring stability, use full-cost as a guide to pricing in an uncertain market where knowledge is incomplete. In cases where cost of getting information are high and the process of trial and error is costly, they use it to reduce the cost of decision making. (iv) Fixed costs must certainly be covered in the long run and firms fell insecure that if they are not covered it in the long run either. (v) Management tends to know more about products cost then other factors which are relevant to pricing. (vi) Cost plus a reasonable margin of profit are taken into consideration for the purposes of price fixation in the price controlled industries in India. Thus this method has the tacit approval of the government. (vii) To conclude, Cost plus is a pricing convention relying on arbitrary costs and arbitrary mark-ups. It is adopted because it is simpler to apply. APPLICABILITY OF THE ABOVE METHOD IN CASE OF FRUITS AND VEGETABLES As we know that this is the most commonly used method of pricing and do followed in case of fruits and vegetables. But the applicability of this method is practically not possible at the initial level (i.e. grower point of view) because at this level the growers of fruits and vegetables are not in a position to ascertain the correct

4 cost of these produces and that s why it will be difficult for them to charge a certain percentage of profit over the cost. But wholesaler & retailer of fruits and vegetables are in a position to ascertain the correct cost of the produces and it become very much easy for them to charge a certain percentage of profit over cost. In other words they know what they have to charge. But in case of bulk production and limited demand this method is not followed and the wholesaler and retailer are bound to dispose of their fruits and vegetables below the cost. 2. PRICING FOR A RATE OF RETURN An important problem that a firm or an organization might have to face is one of adjusting the prices to change in cost. For this purpose the popular policies that are often followed, are as under. (i) Revise prices to maintain a constant percentage mark up over cost. (ii) Revise prices to maintain profit as a constant percentage of total sales. (iii) Revise prices to maintain a constant return on invested capital. In fact rate of return pricing is a refined variant of full cost pricing. Naturally it has the same inadequacies, viz. it tends to ignore demand and fails to reflect competition adequately. It is based upon a concept of cost which may not be relevant to the pricing decision at hand and over plays the precision of allocated fixed costs and capital employed.

5 This above method of pricing is also not applicable at the initial level of the production. As here in case of fruits & vegetables the cost determinants are very much complex and the output from the same area also vary with the seasonal factors. Moreover the labor investment contributes a huge amount in growing of these produces which is not possible to be identified all the times. The applicability of this method is possible at the other further level of marketing structure. For example with the view point of wholesalers and retailers this method is very appreciable. But during the study period it s being observed that this method of pricing is followed in rare cases cause there is a cut throat competition in selling fruits and vegetables. After keeping this fact in mind generally in practice seller at both the level try to sell out their produces with nominal possible margin. 3. MARGINAL COST PRICING This method of pricing is considered as to keep a different approach of pricing. Both full cost pricing and the rate of return pricing based on total costs, comprising fixed and variable costs. Under marginal cost pricing, fixed costs are ignored and prices are determined on the bases of marginal cost. The firm uses only those costs that are directly attributed to the output of a specific product. With marginal cost pricing the firm seeks to fix its prices so as to maximize its total contribution to fixed cost and profit. Unless the manufacturer s or producer s products are in direct competition with each other, this objective is achieved by considering each

6 products in isolation and fixing it s price at a level which is calculated to maximize it s total contribution. This pricing method has its own advantages & limitations according to the circumstances. The above method of pricing is not applicable in case of fruits & vegetables at the initial level. But in rare cases it is found when the season of a particular product gets ended, the wholesaler and retailer of the produces seems to follow this pattern of pricing to cost and a possible contribution to the fixed cost invested. 4. GOING-RATE PRICING This method of pricing is the most commonly used method of pricing. Instead of the cost, the emphasis here is on the market. The firms adjust its own price policy to the general pricing structure in the industry. Where costs are particularly difficult to measure, this may seem to be the logical first step in a rational pricing policy. Many cases of this type are situations of price leadership, where price leadership is well established. Charging according to what competitors are charging, may only be the safe policy according to the market. It must be noted that going rate pricing is not quite the same as accepting a price impersonally set by a near perfect market. Rather it would seem that the firm has some power to set its own price and could be a price maker, if it chooses to face all the consequences. It prefers, however, to take the safe course and conform to the policy of others.

7 The above method of pricing do followed in case of Fruits and Vegetables. Here Mandi Samiti yards of agricultural produce are considered as the industry of the other product and numerous arhatiyas exist in the Mandi Samiti yards try to followed the general pricing structure prevailing in the Mandi Samiti yard (But here it s to be noted that Mandi Samiti does not perform any activity of price fixation, only the majority of arhatiyas own decided price on the basis of demand and supply make a kind of price leadership for rest of the arhatiyas). Hence going rate pricing can be considered as the most popular one method of pricing in case of Fruits and Vegetables. 5. CUSTOMARY PRICING Prices of certain goods become more or less fixed not by deliberate action on the seller s part but as a result of their having prevailed for a considerable period of time. For such goods, changes in cost are usually reflected in changes in quantity or quality. Only when the costs change significantly the customary prices of these goods are changed. Well if a grower or seller of any produce does not follow the customary price and try to sell his product at a lower price to get the maximum sale, A lower price may cause an adverse reaction on the competitors leading to a price war so also on the consumers who may think that the quality of the product is inferior. Perhaps going along with the old price is the easiest thing to do whatever be the

8 reasons, the maintenance of existing price as long as possible is a factor in the pricing of many products and produces. The applicability of the above method can not be neglected in case of Fruits and Vegetables. Customary price are those prices which usually reflected in change in quality or quantity. Only when the cost changes significantly the customary prices of these goods are changed. The application of this method is generally found at the local retail market level. The main belief of this method is that if any of sellers will not follow the customary price he has to face difficulty to sell his produces. 6. MARKET PLUS PRICING This is the most commonly used method of pricing as per which prices may fixed at higher rate then the current market price if the product is better then that of the competitors. Such price is called, price under market plus pricing. Customer will be willing to pay more only when the quality of the product is distinctly better, it has a better package and its brand is well known. Some time while introducing a new product in the marker, marketers want to avail the benefit of new launching and fix market- plus price such a method is known as price skimming. The applicability of the above-mentioned method is noticed largely in case of Fruits and Vegetables. As per the whether conditions and climate of different part of a state variations are found in the quality of the produce, to avail the benefit of these variations the growers and other intermediary are found to charge

9 price as per market plus method. And one very common practice is that when any seasonal produce whether Fruit or Vegetable comes in the market a high price is quoted. ANALYSIS OF PRICE AND PRICE TRENDS OF FRUITS AND VEGETABLES A detailed analysis of price and price trends have been made with the help of tables from 3.1 to For this purpose, average prices, their trend values, fixed base price index and chain base price index have been computed and taken into consideration for selected Fruits and Vegetables. ANALYSIS OF PRICE AND PRICE TRENDS OF VEGETABLES For analyzing the price and price trends of vegetables five vegetables, which are very common have been selected. These vegetables are potatoes, tomatoes, radish, gourd and onions.

10 TABLE NO. 3.1 TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF POTATO (FROM TO ) (Average price per quintal in rupees) Year Average price Trend Values (Y= a + bx ) Fixed Base Chain Base Source: Office of Krishi Utpadan Mandi Samiti, Meerut. The analysis of the above table no. 3.1 reveals the fact that the average prices of Potato kept on fluctuating between Rs per quintal and Rs per quintal, during the period of study i.e. From to

11 On analyzing the fact, we find that the price of Potato was lowest in the year whereas, the highest price of Potato was observed in the year If we have a look on the trend values of Potato we find a slopping upward trend from Rs in the year to Rs in the year When we divert our concentration to fixed base price index these are also repeating the same story of uneven fluctuations in the prices of Potato during the study period. Fixed base index value was found highest i.e. Rs in the year and it was lowest i.e. Rs in the year The chain base index no shows that the prices of Potato came down as compared to its preceding years in , , and and went up during the remaining years. The reason of such uneven fluctuations in the prices of said produce was the uncertainty in the production of this crop. On the basis of data collected, it can be said that the fluctuations in the prices of said produces is a collective result of both climatic conditions and defective marketing practices. One more reason of such fluctuation in the prices, especially in case of Potato is the demand of this vegetable, which remains continuous throughout the year, whereas the production of this produce is restricted to a certain period of time and to make sure the availability of this vegetable throughout the year it is preserved in cold storages. Thus the charges incurred in this process also become part of cost and these charges also vary as per the area specification and so the prices of said produces vary from place to place.

12 TABLE NO. 3.2 TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF TOMATO (FROM TO ) (Average price per quintal in rupees) Year Average. price Trend values Trend values Y = (a + bx) excluding Prices of. ( ) Fixed Base Chain Base a Source: Office of Krishi Utpadan Mandi Samiti, Meerut.

13 The analysis of the above table no. 3.2 clears the fact that the average prices of Tomato remained fluctuating with different degree of increase and decrease between Rs per quintal and Rs per quintal between and The average price of Tomato was lowest in the year and it was found highest in the But as far as trend values are concerned these are showing a slopping downward trend starting from Rs per quintal in to Rs per quintal in , which is practically, seems untoward. So as to make the price trends presentation in a fair manner we eliminated the highly uneven price of Tomato in the year Now if we analyze the table we find that only the prices of are directly responsible for this impractical problem of downward price trends. After eliminating the odd prices of we got the actual slopping upward trend. When we have a look on the fixed base price index of the said produce, we come to know that these are also repeating the same story of uneven fluctuations in the prices, whereas chain base index are showing that the prices of tomato came down as compared to its preceding years in , and and went up during the remaining years. The main reason of such uneven fluctuations in the prices of this produce was fluctuation demand and supply and the delicate nature of the said produce. Import and export factor also affects the demand and supply which causes fluctuations in the prices of the said produce. The reason for high prices in the year was

14 also concerned with high demand and very poor supply of this produce. TABLE NO. 3.3 TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF RADISH (FROM TO ) (Average price per quintal in rupees) Year Average price Trend Values (Y= a + bx ) Fixed Base Chain Base Source: Office of Krishi Utpadan Mandi Samiti, Meerut.

15 The analysis of the above table no. 3.3 reveals the fact that the average prices of Radish remained fluctuating between Rs per quintal and Rs per quintal during and The price of Radish was lowest in the year and highest in the year If we have a look on the trend values in the above table we come to know that these are showing a slopping upward trend which starts from Rs in the year and reached at Rs in the year As far as the matter of price index are concerned, the fixed base price index are also repeating the same story of uneven price fluctuation in the said produce, whereas the chain base index are showing that the prices of Radish came down as compared to its preceding years in , , and and went up during the remaining years. After a careful study of the above table, it can be said that the reason of such uneven fluctuations in the prices of this produce may be attributed to the uncertainty in production of this produce, sometimes due to rains in excess and sometimes due to famine. All these conditions leave their direct effect on the supply of vegetables in the open market which ultimately become the cause of fluctuation in its prices.

16 TABLE NO. 3.4 TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF GOURD (FROM TO ) (Average price per quintal in rupees) Year Average price Trend Values (Y= a + bx ) Fixed Base Chain Base Source: Office of Krishi Utpadan Mandi Samiti, Meerut.

17 The analysis of the above table no. 3.4 clears that the average prices of Gourd remained fluctuating between Rs per quintal and Rs per quintal during and The average price of Gourd was found lowest in the year and highest in the year But as far as the matter of trend values is concerned these are showing a slopping upward trend i.e. from Rs per quintal to Rs per quintal during the study period. If we talk about price index, the fixed base price index are repeating the same story of uneven price fluctuations in the price of said produce, Whereas the chain base price index are showing that the average price of said produce came down as compared to its preceding years in , and and went up during the remaining years. After analyzing the above table, it may be concluded that the reason of such uneven fluctuations in the prices of the said produce is uncertainty in the production of this crop. Sometimes weather conditions are liable for that and all these conditions collectively become the cause of fluctuations in its prices in the market.

18 TABLE NO. 3.5 TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF ONION (FROM TO ) (Average price per quintal in rupees) Year Average. price Trend values Trend values Y = (a + bx) excluding Prices of. ( ) Fixed Base Chain Base a a a Source: Office of Krishi Utpadan Mandi Samiti, Meerut.

19 The analysis of the above table no. 3.5 clears the fact that the average price of Onion kept on fluctuating between Rs per quintal and Rs per quintal during the period of study i.e. from to The price of Onion was found lowest in the year and highest in the year It was also observed that the price of Onion in the year was very high as compared to the prices of the reaming years. Because of that odd figure the overall price trend of the produce showed a negative effect i.e. a slopping downward trend, which practically seems untoward. Hence to present the price trend in a fair manner, we eliminated the odd prices of and got the actual price trend in the IInd column of price trend. Now we see that the trend values are showing a slopping upward trend which starts from Rs in the year and ends at Rs in the year As far as the price index are concerned, the fixed base price index are showing the same uneven fluctuation in the prices of the said produce as it was shown by the average price itself, whereas the chain base price index are showing that the prices of Onion came down as compared to its preceding years in , , and In the end it can be concluded that the reason of such uneven fluctuations in the price of said produce may be attributed to the uncertainty in the production of this crop, sometimes due to rains in the excess and sometimes due to famine. All these conditions leave their direct effect on the supply of vegetables in the open market, which ultimately become the cause of fluctuations in its prices.

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21 ANALYSIS OF PRICE AND PRICE TRENDS OF FRUITS For the analysis of price and price trends of fruits five fruits which are very common have been selected. These fruits are apples, mangoes, pomegranate, bananas and guava. The analysis with the help of tables as follows: TABLE NO. 3.6 TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF POMEGRANATE (FROM TO ) (Average price per quintal in rupees) Year Average price Trend Values (Y= a + bx ) Fixed Base Chain Base

22 , , , , , , , , , , , , , , , , , , , , Source: Office of Krishi Utpadan Mandi Samiti, Meerut. The analysis of the above table no. 3.6 clears, that the average prices of Pomegranate remained fluctuating between Rs. 1, per quintal and Rs. 1, per quintal during the period of study i.e. from to The average price of pomegranate was lowest in the year , and the highest price was found in the year As far as the trend values are concerned these are showing a slopping upward trend, which begins from Rs. 1, per quintal and reached at Rs. 1, per quintal during this period. If we talk about the price index of said produce, the fixed base price index are also pointing out the uneven

23 fluctuations in the average price of said produce, whereas the chain base index are showing that the pieces of pomegranate came down as compared to its preceding years in , , and and went up during the remaining years. After analyzing the above table it can be concluded that this particular product seems very less effected with price fluctuations. If any fluctuation is there, it can be regarded as effected from demand and supply. For example in the year the production of pomegranate was very less but the demand remained as usual and caused high price of the said produce. TABLE NO. 3.7 TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF BANANA (FROM TO ) (Average price per quintal in rupees) Year Average price Trend Values (Y= a + bx ) Fixed Base Chain Base

24 Source: Office of Krishi Utpadan Mandi Samiti, Meerut. The analysis of the above table no. 3.7 reveals the fact that the average prices of Banana remained fluctuating between Rs per quintal and Rs per quintal during the study period i.e. from to The lowest price of banana was found in the year and the highest price of Banana was observed in the year If we talk about the trend values of said produce, these are showing a slopping upward trends starting from Rs per quintal which reaches to Rs per quintal during the study period.

25 If we have a look on the price index of said produce, we come to know that the fixed base price index are also clearing the fact that there is an uneven fluctuation in the average price of banana. As far as chain base price index are concerned, these are showing that the price of this fruit came down as compared to is preceding year values in , , , and After analyzing the above table and considering the view points of sellers and growers, it can be said that fluctuations in the prices of banana is not that much uneven as it prevail in case of other fruits and vegetables. Whatever may the reason of such fluctuations but the main reason of this fluctuation can be pointed out as a result of only the inflation. It is also noticed that the prices of Banana got increased year by year, which seems very genuine. TABLE NO. 3.8 TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF APPLE (FROM TO ) (Average price per quintal in rupees) Year Average price Trend Values (Y= a + bx ) Fixed Base Chain Base

26 , , , , , , , , , , , , , , , , , , , , Source: Office of Krishi Utpadan Mandi Samiti, Meerut. The analysis of the above table no. 3.8 makes this fact clear that the average prices of Apple remained fluctuating between Rs. 1, per quintal to Rs. 2, per quintal during and The price of Apple was lowest in the year and it was found highest in the year If we talk about the trend values of the said produce, these are showing a slopping upward trend of increase in the prices starting from Rs.1, per quintal which reached at Rs.2, per quintal during the study period. As far as the matter of price index are concerned, these are showing an uneven and a sudden fluctuation in

27 the prices of this fruit. In other words fixed base price indexes are repeating the same story of uneven fluctuations as narrated by average price of the said produce, whereas chain base index are showing that the prices of Apple came down as compared to its preceding year in , , and and went up during the remaining years. After a care full study, we came to know that the prices of the said produce was that much less because of low quality and high supply and a very low demand. TABLE NO. 3.9 TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF GUAVA (FROM TO ) (Average price per quintal in rupees) Year Average price Trend Values (Y= a + bx ) Fixed Base Chain Base

28 Source: Office of Krishi Utpadan Mandi Samiti, Meerut. The analysis of the above table no. 3.9 reveals the fact that the average prices of Guava kept on fluctuating during the period of study between Rs per quintal and Rs per quintal. The average price of the said produce was lowest in the year and highest in the year If we have a look on the average price of Guava, we find that there was almost a continuous increase in the prices of this produce except in the year As far as the matter of trend values are concerned these are showing a slopping upward trend, which starts from Rs per quintal and reached at Rs per quintal during the period of study.

29 If we go through the price index of the said produce, we find that the fixed base price index are showing an uneven fluctuation as shown by the average price itself. As far as chain base index are concerned, these are showing that the prices of Guava came down as compared to its preceding years in , , , and and went up during the remaining years. After a careful study of the above table, it can be concluded that the prices of Guava get fluctuated during this period with a moderate degree. It is another matter that in the year , a high degree of fluctuation was found, but it was because of the poor supply of the said produce. In this year the quality of the crop got affected due to some diseases. But actually the fluctuations in the prices were because of the poor selling conditions and defective supply system as per market survey. TABLE NO TABLE SHOWING MANDI PRICE, PRICE TRENDS AND INDICES OF MANGO (FROM TO ) (Average price per quintal in rupees) Year Average price Trend Values (Y= a + bx ) Fixed Base Chain Base

30 Source: Office of Krishi Utpadan Mandi Samiti, Meerut. The analysis of the above table no reveals the fact that the average prices of Mango remained fluctuating between Rs Per quintal to Rs per quintal during and The prices of Mango was found lowest in the year and highest in the year i.e. Rs per quintal. As far as the trend values are concerned these are showing a slopping upward trend starting from Rs per quintal to Rs per quintal during the period of study.

31 If we come to the price index of the said produce, we come to know that fixed base price index are repeating the same story of uneven fluctuations in prices of this produce. The chain base index are showing that the prices of Mango came down as compared to its preceding year in , , and and went up during the remaining years. After a careful study of the above table and considering the relevant information during this period, it can be concluded that there is a very high degree of price fluctuations in the prices of Mango. One reason for these fluctuations is the popularity of this fruit in the country and abroad, because of this factor the demand of this produce remains very high as compared to its availability. It was also found that the quantum of produce is getting lesser year by year and the quality & quantum of this produce gets affected with so many diseases very soon. Unawareness of growers and continuous reducing production area is also a cause of price fluctuations. Also the Variations in the climatic conditions put limits on their production and the seasonal nature of their production create an imbalance between supply and demand which become the cause of fluctuation in the prices of said produce.

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33 REASONS FOR PRICE FLUCTUATIONS During the study period it s being observed that there have been so many reasons due to which we noticed fluctuations in the price of Fruits and Vegetables such as increase or decrease in demand, Increase or decrease in supply, weather and of course the perishable nature of fruits and vegetables. Moreover, the increase and decrease in the demand and supply of these produces have been performed an important role in the fluctuation of the prices of these produces. During the study period we observed the price trend of these produces in all the seasons and at all the religious occasion. We noticed as the demand of any produces increase automatically at all the level. But still we find day to day fluctuations at the local level too. As far as the supply and weather conditions are concerned these two factors work together in the price fluctuations of fruits and vegetables. As every Fruit and Vegetables has its own season to grow. If we talk about season, it means a plenty supply of that particular seasonal fruit and vegetable. The plenty supply of any produces causes a decrease in price and shortage in supply causes increase in price. But still we find an increased opening price when the seasonal produce is introduced, and gradually a decrease in the prices is observed, that is because of bulk supply and limited demand or not storable nature of the produces for considerable period of time. Moreover, variations in climatic conditions put limits on their production and the seasonal nature of their

34 production created an imbalance between supply and demand. This is particularly true in short period. In a year of short supply the prices tend to move up, while in a year of high production the prices decrease considerably. Sometimes export factors also observed to contribute in the fluctuation of the prices of Fruits and Vegetables. As export results a demand from abroad and a shortfall of supply in the country. In this case the simple law of demand is being observed to work. Channels of Distribution are the most powerful element among marking mix elements and sometimes causes a great fluctuations in the prices. There is a chain of intermediaries between the producers & consumers having their own charges at those particular levels. If the produces reach to the consumer through various intermediaries the price of that produces will automatically raise and this thing do happen in case of Fruits and Vegetables, as there is a different distance between the producing place and consumers. We have discussed that the nature of the produces or sometimes seasonal factors affect the supply of produces, but one very much uncertain and important factor is also noticed during the study period and that is uncertain and unavoidable strikes of transporters. As the whole of the produces can not be sold at the producing area and the growers have to approach the other places to sell their produces. For this purpose they need the help of transporters to make sure the supply of their produces to the other places. When the transporters go on strike, the supplies of produces

35 to the desired place get stopped and cause an unwanted fluctuation in the price of the produces. * * *