Pir Mehr Ali Shah

Arid Agriculture University, Rawalpindi

Office of the controller of Examinations
Final Exam / Spring 2020 (Paper Duration 48 hours)
To be filled by Teacher

Course No.: …………………MGT-351…..………………….Course Title: INTRODUCTION TO MARKETING

Total Marks: ……….……30…………………………Date of Exam: ………........6/8/2020.......……………………………..
……...................
Degree: …BSCS……………………………………………. Semester: ……………6TH……..………… Section: ………B………
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Q. No. 1 2 3 4 5 6 7 8 9 10 Obtained/Total Marks if
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Marks ** **
Obtained Expression Expression
is faulty **/ is faulty **/
30 30
Total Marks in Words:
Name of the teacher who taught the course:
Signature of teacher / Examiner:

To be filled by Student

Registration No.:17-Arid-518 Name: Muhammad Abdul Manan Ajmal

Answer the following questions in the specified area (add more lines/insert images if needed).

Q.No.1. Give the detailed explanation of pricing strategies.

(05)
Answer:

Pricing

Definition

“The amount of money charged for the product or services, or sum of the values that customers
exchange for the benefits of having the product or services.”
Pricing strategy

A pricing strategy is a method used to establish the best price for a product or service. Pricing
strategy helps you to choose prices to maximize profits and shareholder value while considering
customer and market demand.
Different pricing strategies
1. Market Price skimming

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 2. Market Penetration pricing
3. Value based pricing
4. Competitive pricing
5. Cost plus pricing
6. Premium pricing
7. Psychology pricing
Price skimming
That means
In this strategy, the firm charges the highest initial price of the product that customers will pay and
then lowers it over time. As the first customer is satisfied with product price and competition
enters the market, the firm or organization lowers the price to attract the other customers.
Main definition
“Setting a high price for a new product to skim maximum revenues layer by layer form the
segments willing to pay the high price, the company makes fewer but more profitable sales.”
This strategy aimed at the segment that is interested in quality, and status.
The main goal of this strategy is profit maximization, return on investment an early recovery of
cash.
Penetration pricing
This strategy approach aims toward the mass market to gain high volume of sales.
The goal of this strategy are volume of the product and improve market share.
Main definition
“Setting a lower price for new product in order to attract a large number of buyers and a large
market share.”
Penetration pricing is a strategy where the price of the product at starting is low to rapidly reach a
wide position of market and initiate word of mouth. Because of the lower price, the strategy works
on the expectation that customers will switch to the new brand.
Value based pricing
Value based pricing is a pricing strategy which sets prices primarily, but not exclusively,
according to the estimated and determined value of the goods or services to the customers rather
than according to the cost of the product or different historical places.
In value based pricing, setting a price based on how much the customer satisfy or believes what
you are selling is worth.
Competitive pricing
Competitive pricing is the strategy process of selecting strategic price to best take benefit of a
product based market relative to competition. This strategy method is used that businesses that are

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selling similar products since services are vary from business to business, while the attribute of the
goods remain same.
In this, setting a price based on what the competition charges.
Cost plus pricing
Cost plus pricing is a pricing strategy in which the selling price of any product is determined by
adding a specific markup to a product’s until cost. An alternative pricing method of this is value
based pricing.
It is also called markup pricing, is the practice by a company of determining the cost of the
product to the company and than adding a percentage on top of that price to determine the selling
price to the consumer.
Premium pricing
It is the pricing strategy when a business sets its prices higher than its competitors. For new
business organization when there is need of luxury product or service, premium strategy often
work best. You expect more from premium price segment when your product is more unique.
For premium pricing to be a success, you should try to shape your customers perception of value.
This can be done in the way you market and communicate your product.
Psychology pricing
It is a pricing strategies used by the businesses, that are used to encourage their customers to
respond on an emotional level rather than logical level. It is a strategy that are used to create an
enhanced illusion of value for the customer. The “99 effect” is a good example of psychology
pricing. It is proven that for any business customers are more likely to buy a product when its
price is 99p, rather than 9.99 or $10 etc.
Researchers believe that by doing this, people or customers feel like they are getting more value
for their money.

Q.No.2. what is promotion explain its types objectives, channels, and budgeting in detail.
(05)
Answer:
Definition:
 Promotions refer to the whole set of activities, which communicate the product, brand
or service to the user. The idea is to make people informed, attract and induce to buy the product,
in preference over others.
Description:
 There are specific types of promotions. Above the line promotions comprise
advertising, press releases, consumer promotions (schemes, discounts, contests), while below the
line include trade discounts, incentive trips, awards and so on. Sales promotion is a part of the

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general promotion effort.

There are also:

1. Personal selling: one of the most effectual ways of customer relationship. Such selling works best
when a good working relationship has been up over a period of time.

2. Sales promotions: this includes freebies, contests, discounts, free services, passes, tickets and so
on, as
distinct from advertising, publicity and public relations.

3. Public relations: PR is the deliberate, planned and comfort effort to establish and maintain mutual
understanding between the company and the public.
The following are the main goals of promotion:
1.Building product and product awareness:
A number of marketing promotion strategies are very effective
in introducing customers to products and products for the first time.
2.Creating interest:
Marketing promotions are mostly found in the interest rate attack on the product. In fact,
interest-bearing is often regarded as one of the most important uses of sales.
3.Provide information:
Promotional services provide comprehensive information about the product to
customers. This goes a long way in turning interest into real sales.
4.Renewal need:
Effective promotional services can stimulate product demand by convincing
consumers to buy products.
Strengthening the Brand:
The promotion can be used to reinforce or strengthen the product in the minds of
customers. This will ensure repeated product sales at the end.
6. To attract new customers:
Marketing strategies also play an important role in attracting new customers to
the organization.
7.To attract existing customers to buy more:
Promotional services can increase purchases made by existing
customers by making them more expensive or spending more time
8.Helping the firm to stay competitive:

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 Companies do sales promotion activities to stay competitive in the
market. Therefore, in today's competitive world no firm company can escape the sales pitfalls.
9.Increasing sales in off-times:
Sales of products naturally decrease over the off-season. Promotional
activities can therefore be initiated during off-season to maintain or increase sales. Strategies such as
seasonal discounts, short season offers can achieve this.
10.To add to the stock of the dealers:
Dealers like wholesalers and retailers usually deal with a
variety of goods. Their selling activity becomes easier when the manufacturer supplements
their efforts by sales promotion measures.
11.To Keep Existing Customers:
A sales promotion can be geared toward
keeping existing customers, especially if a new competitor is likely to
enter the market
12.To clear inventory:
Promotional techniques can be effectively used to clear unsold
inventory by giving effective offers.

Types of Promotion

1.Advertising

Advertising means to advertise a product, service or a company with the help of television,
radio or social media. It helps in spreading awareness about the company, product or
service. Advertising is communicated through various mass media, including traditional
media such as newspapers, magazines, television, radio, outdoor advertising or direct mail;
and new media such as search results, blogs, social media, websites or text messages.

2.Direct Marketing

Direct marketing is a form of advertising where organizations communicate directly

to customers through a variety of media including cell phone text messaging, email, websites,
online adverts, database marketing, fliers, catalog distribution, promotional letters and
targeted television, newspaper and magazine advertisements as well as outdoor advertising.
Among practitioners, it is also known as a direct response.

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3.Sales Promotion:

Sales promotion uses both media and non-media marketing communications for a pre-
determined, limited time to increase consumer demand, stimulate market demand or improve
product availability.

4.Personal Selling:

The sale of a product depends on the selling of a product. Personal Selling is a method where
companies send their agents to the consumer to sell the products personally. Here, the

feedback is immediate and they also build a trust with the customer which is very important.

5.Public Relation:

Public relation or PR is the practice of managing the spread of information between an

individual or an organization and the public. A successful PR campaign can be really
beneficial to the brand of the organization.

Let's take a look at some of the most popular forms of digital channels:

1. Pay-per-click advertising (PPC)

One-click payment (PPC), also known as cost-per-click (CPC), is an online advertising model
used to drive traffic to a website. The advertiser (you) pays the publisher each time the ad
clicks. There are many platforms that offer PCC advertising, such as Google AdWords,
Yahoo Search marketing and Microsoft Bing.

2. Search engine optimization (SEO)

Search Engine Optimization (SEO) is more than a buzzword. Here's how to find these "hot"
customers, who go to search engines and type in a query to find what they need and buy.

If you have exactly what they need, in the same terms, they can set up a consultation and use
you with your services if they sound good.

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Search traffic is the most important source of sales. Con is a very risky environment, as there
is a ton of competition and hiring with the help of adding your SEO can be very expensive
sometimes.

3. Social media marketing (SMM)

The great advantage of social media is that there is a ton of users on each platform and in
many cases, people are already gathered in interest groups and targeted audiences are already
formed. With SMM, companies can reach the most targeted customers by engaging directly
and personally .

Here are a few social media networks and short-term rust:

 Facebook: To access almost any type of regular customer, you can browse specific
groups and pages that your clients can always use.
 Twitter: If you are developing a new business and want access to first-time importers
because this section generates quick product awareness.
 LinkedIn: Access to professionals, business owners and Business-to-Business (B2B)
leads and targeted clients - this could be a great platform for career-centric trainers.
 Google: Access to the first recipient of new businesses and B2B and general social
media users.
 Pinterest: Focus on the visuals of promotional Brand and your products. Most of the
users on Pinterest are women so if your best client is a woman, this might be a good
fit for your teaching business.
 Instagram: Like Pinterest, Instagram has focused on visuals and has become a
popular choice for many small businesses and entrepreneurs as its popularity grows.

4. Digital TV

Every year, digital television is increasingly pressured by analog and gradually integrates
with online applications. Already going through this channel of marketing you can use your
TV to go to your Facebook page, watch a video on Vimeo or get the latest news.

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5. Word of mouth marketing (WOMM) or Social Engineering Marketing
(SEM)

The best way to use the word oral marketing (WOMM) is to start with who knows and create
what comes out of them.

6. Interactive screens, POS terminals:

We often meet them in a store, on the street, or on a train. This is a type of digital media that
replaces the standard external advertising, because it allows you to interact more with the
buyer and connect him or her with a message or, like POS terminals, help you make
purchases.

7. Retargeting:

The most effective resuscitation tool - a technical solution that allows you to show your ads
only to those users who have taken action on your site.

Here are two different ways this can be done:

Targeted advertising: based on demographics, past customer purchase history or web

behavior.

Content advertising: based on what the user is watching, either through page ads or pop-up
ads.

9. Digital Art.

This is any kind of art where a computer is used to create or produce art. It can be image,
audio, animation, video, game, website, algorithm, functionality or installation. Many

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traditional forms of art incorporate digital technology and as a result, the boundaries between
traditional works of art and digital media become shorter.

Promotional Budget

Promotional Budget:

a certain amount of money set aside to promote the products or beliefs

of a business or organization. Promotional budgets are created to look at the significant costs
associated with growing a business or maintaining a brand name.

How Promotional Budgets Work

Advertising and business marketing represent the cost that many businesses have a hard time
predicting, which is why the percentage method is used. The promotional budget can be
increased in anticipation that new product lines are set to release soon.

Higher promotional budgets can reduce profits during the installation of such assets.
Companies can afford such a high cost depending on the assumption that sales or awareness
will increase among customers.

How to Create A promotion Budget:

 The promotional budget gives you a general idea of how much money you need to get
your message across in the right target market and bring in sales.
 While there are many ways to build a used budget, combining strategies may work
best to come up with a more accurate budget.

Q.No.3. what is publicity and advertisement? Discuss about its scope, planning, development, and its
implementation also clarify the difference between them.
(05)

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Answer
Publicity
Definition
In marketing publicity is important factor, use as public visibility or awareness for any product,
service and organization. In marketing term, publicity is one of the component of promotion and
marketing.
Example
The main example of publicity is word of mouth
Advertisement
An advertisement is the promotion of a product or brand to a viewership in order to attract interest
of customers, and sales. Advertisement are in many forms, from copy to interactive video, and
also feature of app marketplace.
Example
Newspaper, magazines and brochure advertisement, television and radio advertisement, hoardings,
flags, banners.

Publicity
Scope
The scope of publicity is defined in the market asThe main reason why the word publicity was
approved batter as advertisement as, it is the work of advertising controller came within the
general classification of public relations. Publicity is the term that conveys the wider implications
of the duties that advertising or publicity is intended to fulfill.
Planning
Following factors are take into account while planning your publicity strategy
 Firstly clearly define your goals, what you want
 Identify your target audience, As there groups you specially want to reach than add into
list.
 Select the most effective technique to reach each target audience.
 Be creative, diversify you publicity.
 Include electronic median and social media in your plan.
 Determine the resources that are needed to fulfill your goals, and don’t forget to plan
for your budget.
 Your publicity outreach does not ending at the event. Send out photos on your websites
and social media to encourage participants this time and for the next year.
 Keep copies of your budget and press releases for next year help and planning.

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  Partner with related companies and leaders in other disciplines to enhance your
promotional reach.
Development and implementation
Development and implementation of publicity involves
 For developing and implementing any business strategy for publicity your first need to
identify your target audience. Their demographics etc.
 Selecting media for development and implementing, like newspaper and magazines, radio,
window display, fairs and exhibition.
 Write a content for publicity
 See the success and change your developing theme if there is an issue and if customers not
satisfy.

Advertisement
Scope
The scope of the advertisement is increasing everyday.
These include
Scope of advertising by deliverables
Once the budget for product is decided, than the marketing plan can be projected more. A detailed
scope of works and functions can be outlined that are required by deliverables. Agencies are now
create a proposed resource plan.
Scope of advertising by allocating deliverables
For efficient work, allocating the type of deliverables, which include TV, mobile, press,
magazines etc, which are based on the previous requirements can be more insightful after previous
plan.
Scope of advertising by strategy
Once the deliverables are allocated, the agencies are define the strategic requirements by brand
and develop a scope of work based on previous requirements for similar strategic deliverables.
Planning
Advertising plan may involve following steps
 Start with you goal, that what do you want? Are you trying to attract your customers
towards your company? What type of customers you need and in what time period?
 Then develop your budget, built advertising plan that is fit for your budget.
 Define your audience, What are your target audience. When you are focused on
increasing sales, it is helpful to know who is most likely to buy your product.
 Determine what products or services you will feature.

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  Complete your SWOT analysis, means company strengths, weaknesses, opportunities
and threats. What is your business core? What do you do that give you advantage in
future.
 Build your advertising plan, The most important thing to answer three things. What,
when and where. What type of advertisement are you going to execute? When are you
going to execute? and Where are you going to execute?
 Consider other low cost methods
 Launch your advertising, Keep everything consistent, no matter the medium or
channel. Consistency is very important while launching advertisement.
 Analyze results
Development and implementation
Development and implementation of advertisement involves some stages that are as follows
Identify Target audience
First identify your target audience. Small companies create products or services to meet the needs
of their customers. But no one of goods appeals to mass audience. Advertising manager must
target customers with certain characteristics. Study the demographic research to determine your
target audience. Demographic study includes age, education, income.
Selecting advertising media
Select advertising media that are suitable for your target customers. Media include newspaper,
magazine, yellow pages, radio, internet, television advertising. Many social media site are also
available such as facebook, twitter. The right choice of media while development of advertising
will help you reach customers who are most likely to purchase your product or service.
Create your content
Create content for your advertising. Content pertains to different words, dialogue and art work
contained in advertisements. Design content are also needed to fit specific format of the chosen
medium.
Test Advertisement power
Test your AD, means test effectiveness of your advertising during the various stages. Continue
study of demographics of new customers to ensure that you are targeting the right customers. Test
media sources to know about which source give the profit. Conduct phone calls to test consumer
recall for your business slogan.
Comparison between Advertisement and publicity
Publicity Advertisement
It is not paid form of communication. It is paid by the sponsors who wants to advertise
the their product.
It is carried through newspaper, radio, magazine,
Large numbers of social media are used. Based

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 Television. on various factors like cost, type of message,
reliability.
It is not to be repeated. It takes place only once.Repetition are involved according to company’s
need. It can be repeated if company wants.
Company has no control over publicity in termsCompany has complete control over advertising.
Of message, frequency, medium and time.
Publicity can be done at a much lower than It is more expensive promotional tool
Advertising.

Q.No.4. what is distribution? Discuss about the channel selection criteria, also discuss its importance,
function and recent trends in retailing and wholesaling.
(05)
Answer:
Definition: 
Distribution means to spread the product throughout the marketplace such that a large number of people
can buy it.

Distribution involves doing the following things:

1. A good transport system to take the goods into different geographical areas.
2. A good tracking system so that the right goods reach at the right time in the right quantity.
Description: 
Distribution can make or break a company. A good distribution system quite simply
means the company has greater chance of selling its products more than its competitors.
Channel selection criteria
Some of the factors to consider while selecting channels of distribution are as
follows:

1) Product
2) Market
3) Middlemen
4) Company

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 5) Marketing Environment
6) Competitors
7) Customers Characteristics
8) Channel Compensation
We have to consider the following factors for the selection of channel
of distribution:
1.Product:
Perishable goods need speedy movement and shorter route of distribution. For
durable and standardized goods, longer and diversified channel may be necessary.
Whereas, for custom made product, direct distribution to consumer or industrial
user may be desirable.

(ii) Market:
(a) For consumer market: retailer is essential whereas in business market
we can eliminate retailing.

(b) For large market size: we have many channels, whereas, for small
market size direct selling may be profitable.

(c) For highly concentrated market: direct selling is preferred whereas

for widely scattered and diffused markets, we have many channels of distribution.

(d) Size and average frequency: of customer’s orders also influence the
channel decision. In the sale of food products, we need both wholesaler and
retailer.

Customer and reseller analysis will provide details on the number, type, location,
purchase methods of buyers and sellers in this case may influence the choice of
channels.
For example: the desire for credit, the need for personal service, the amount and
time and effort the customer is willing to use - all important factors in choosing
channels.
(iii) Middlemen:
The insiders could offer great cooperation within
Promotional services are also popular.

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A channel that produces the highest volume of sales is a low unit.
(iv) Company:
(a) The size of a company determines the size of the market, the size of its major
accounts and its ability to set up partnerships. A large company may have a shorter
channel.
(b) Corporate product integration influences channel pattern. Brother
(v) Marketing Environment:
In times of decline or depression, a shorter and cheaper
channel is preferred. During prosperity, we have a wide selection of other channel
options.
Distribution of perishable goods even in remote markets becomes a reality due to the
cold, transportation and storage conditions.
Therefore, this leads to an increased role of accountants in the distribution of
perishable goods.
(vi) Competitors:
Marketers look for channels used by their competitors. In most cases,
the same channels may wish to deliver a distribution of the company's products.
At one time, sellers deliberately avoided the channels used by rivals.
For example:
a company can go past a grocery store (used by competitors) and
accept door-to-door sales (where there is no competition)
(vii) Customer Features:
This means the distribution of the geographical location, frequency of purchases, the
average purchase price and the number of prospective customers.
(viii) Channel compensation:
This includes profit analysis.
Major cost items for distribution other than station compensation, travel, storage,
storage insurance, management compensation for shipping personnel and interest on
acquisitions acquired at various retail outlets.
Distribution Cost Analysis is a fast-growing area and perhaps the most rewarding area
for cost analysis and management.

The functions of the distribution channels are:

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 a. Information - Sales channels do the job of collecting and disseminating
marketing information about customers, competitors and potential customers and
other potential marketers.
b. Promotion: Motivational communication is still distributed through channels to
customers. Channels also often assist in the creation of these communication
messages.
c. Negotiation: Channel members are the ones who negotiate with other channel
members and customers to facilitate the transfer of ownership.
d. Funding: Marketing channels work to raise and allocate funds needed to invest
in startups at different levels of marketing channels.
e. Risk: Channel members pose a risk to performing channel work.
f. Physical management: The members of the channel also take on the
responsibility of storing the goods during the successive stages to the final customers.
g. Order: This function deals with the communication of channel members regarding
the purpose of purchase.
h. Payment: The members of the channel also fulfill the obligation of consumers to
honor their payments to merchants through banks and other financial instruments.

The Distribution Channels Importance

Trading channel system decisions affect other marketing decisions as well, and as a result are
among the most critical decisions. The choice of the channel itself depends on the marketing
strategy of the company in terms of segmentation, direction and positioning. Advertising
channels should not only see markets but should also market as one of the key roles of
marketing channels is to convert potential buyers into potential customers

Retail Trends

1.Eliminating Delayed Gratification

Today's consumers want their need to be met as quickly as possible. It was not long
before online shoppers believed it made sense to wait weeks for their products to
arrive. Now, almost a decade later, consumers are starting to expect free overnight
delivery to online retailers. The gold standard for 2020 could be Amazon Prime Air,
which uses drones to deliver certain products to customers within 30 minutes or less.

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 This can be done by paying for your in-app purchases and by downloading your order
from the store, or by using close communication technology (NFC) to tap your phone
to experience instant payment sensor.

2.Simplified Experiences Through Personalization

Personalization has become the new foundation for resale for most of a decade. However,
the capacity for personal action will reach new heights by 2020. Instead of using
customer data to send them targeted ads and promotions, marketers will use man-made
information to create simple, targeted shopping processes. For consumers who are
stressed today, this can add value.

3.Socially Integrated Visualized Search

Have you ever seen a passerby with an outfit that you liked, and wondered where
they bought it? Retailers are providing an answer to this situation by optimizing
their product offerings for visual search. Visual search allows users to simply
take a picture of the outfit – or download a photo of a similar outfit – and search
for articles of clothing within the picture. Then, a search engine like Google will
provide a list of matching items, giving users an easy path to purchase.

3. Ubiquitous In-Store Technology and Analytics

Have you ever seen a passerby with a favorite garment, and you wondered where they could
buy it? Vendors provide feedback on this situation by improving their visual product
offerings. Visual search allows users to simply take a picture of a dress - or download a photo
of the same outfit - and search for the dress code inside the photo. After that, a search engine
like Google will provide a list of similar items, giving users an easy way to shop.

Q.No.5. Discuss these concepts in detail:

1. Break even analysis.
2. Importance of pricing
3. Cost based pricing
4. Target pricing
(10)
Answer
Break even analysis

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What is break even analysis?

Break even analysis is used to determine how much sales volume of our business need to start making
a profit. The breakeven analysis is especially useful when we are developing a pricing strategy either
this is a part of marketing plan or a business. The break-even point is the point where the cost and
revenue are equal.

Total cost=total revenue=break-even point

Break-even point

A break-even point shows at what level cost and revenue are equal.

It is a point where loss case is occur while profit have not yet began.

Cost involve in break-even analysis

 Variable cost
 Fixed cost

Variable cost

Variable cost is type of cost change with change in production level or sales. For example cost of
material used in the production of the goods.

Fixed cost

Types of the cost that remains same for a long period of time for example rent, insurance and wages.

Importance of break-even analysis

 Helpful in deciding the minimum quantity of sales

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  Helpful in determine the tender price
 Helpful in examine the effect a company profit.
 Helpful in sale price and quantity.
 Helpful in determine the marginal cost.
 Limitation of break -even analysis
 It help to determine the target capacity of an industry to get benefit of minimum per unit
production cost.
 Establishing the point form where the company can start paying dividend to shareholders.

Limitation of break-even analysis

 The assumption that variable costs remains proportional to volume at all output level.
 The assumption that price is constant over relevant volume levels.
 Cost use in the analysis may be relevant over a limit range of volume.

Importance of pricing

Pricing is an important decision that is making after the product is manufactured. Price determines the
future of the product, acceptability of the product to the customers and return and profitability from
the product. It is a tool of competition.
Helps in Determining Return
The primary motive of all firms is to earn profit. Firms aim at maximizing its profit. When the product
is manufactured the manufacturer determines the price of the product. Price includes the r profits that
marketer intends to earn.
Determines Demand, Sales Volume and Market Share
Price is the most flexible tool in the marketing mix. A marketer can regulate the demand for a product
by increasing or decreasing the price. Price is an important factor influencing consumer buying
behavior. Most of the time consumer put importance on price of the product rather than on value, at
the time of purchase.
Countering Competition:
A marketer’s pricing strategy mostly depends upon competitor’s pricing policy. Companies regularly
revise their pricing strategies to counter the competition. A market leader who dominates the market
designs the pricing strategy to prevent new competitors entering into the market. While a price
follower sets their price in accordance to the competitor’s price and market leader’s price
Builds Product Image:
Price often builds an image of the product. Consumers believe that high priced products are of high
value and benefit than low priced product. Marketers also use price to position their products superior
in the minds of the consumer.
A Tool of Sales Promotion:
Price is an important tool of sales promotion. Companies often resort to short term price reduction
like offering discounts to increase sales during a short time period.

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Cost based pricing
Cost based pricing is a process of setting the price as a result of adding a profit margin to the cost of
the product or service. This pricing method guarantees that certain profit is obtained above total cost.
Examples
When determining prices for products and services, companies commonly apply cost based pricing.
This means to fix prices by calculating total cost and then adding a pre-defined percentage as profit
margin. For example, if the manufacturing cost of a computer is US$1,000 and the price is defined
like cost plus 10%, when the manufacturer sells a computer to the distributor charges US$1100. This
is US$1,000 plus a $100 of profit.

Target pricing

In target pricing, the selling price for a product is determined first. Based on the marketing department
the most competitive price that the customers would be willing to pay is fixed as a selling price.

Now, the desired profit margin is deducted from the selling price to arrive at a cost within which the
production department would have to produce the product or procurement department would have to
procure the product.

Example

For example, ABC Ltd. is in the business of manufacturing dresses or uniform for high school girls.
The average price at which the dresses sell in the market is 1000. So, ABC Ltd. also fixes the selling
price of 1500 for its up-scale range of uniform.

Now, the desired markup is 25% on selling price. So the profit margin is 500 per uniform. Hence, the
cost price within which the manufacturing department would have to manufacture every single dress
will be 1000 (1500-500).  In order for that product line to be profitable, ABC Ltd. has to ensure that
its total cost per unit doesn’t exceed 1000. And the lower is able to bring down the cost per unit;
higher will be its profit per dress. Target pricing can overcome the limitations of Cost-plus pricing.

Advantages of target pricing

 It is a dynamic method of price determination that takes into account and responds to
market factors of demand and supply while determining the selling price.
 It results are in higher profitability for business by way of reducing cost
 It provides the opportunities to promote efficient and optimum utilization of resources
within the company.
 It leads to creative and permanent ways of bringing down the cost of the product and leads
to permanent technological and economic gains for the company.

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  It leads to the availability of value-added products and services to the customers. Many-a-
times, the company passes on the benefits of cost reduction to the customers and hence
they are able to enjoy better products at lower prices.
 As a result of a proactive approach to fixing the price, the business is better equipped to
predict and respond to market changes. Coordination amongst its various departments such
as production, marketing, design, and engineering enables it to form a cohesive strategy in
the event of any major shift in trends.

Disadvantages of target pricing

 Target pricing relies on estimating the final selling price of the product correctly. Any error
on this front may cause the entire marketing strategy to fail.
 Estimating too low a price and then accordingly fixing very rigid constraints on cost may
place the burden on the production department.
 Sometimes, in order to achieve a narrow-minded goal of reducing cost, the organization
may resort to using cheaper technology or materials or faulty designs which may not
suitable in the long run on the company or the customers.
 While estimating a selling price and cost, the company has to work out the quantity it
desires to sell at those prices in order to achieve a markup. If the business fails to sell that
many numbers of units, it is bound to suffer losses.

**THE END**

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