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M/S. Ramlal & Sons started manufacturing oximeters which has a great demand in this time of Covid 19’for domestic use and otherwise also it is an equipment in demand by the medical professionals. While fixing the selling price for the same Ramlal wants to adopt a method where he can just cover the cost and earn a nominal amount of profit. His sons advised him to fix the price initially at a higher rate and then reduce the price when the demand has reduced. According to them this method would help them earn a good profit. He hired an agent, Satish, who advised him to initially keep the prices low to attract the market and then he can slowly and gradually increase the price. 

In the given context answer the following questions; 

a. Identify and explain the method that Ramlal is planning to adopt. 

b. Explain the method of pricing suggested by Ramlal’s sons and his agent respectively?

1 Answer

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a. Cost plus pricing 

The most common technique is cost-plus pricing, where the manufacturer charges a price to cover the cost of producing a product plus a reasonable profit. Cost-plus pricing is typically based on a manufacturing estimate. Estimates of the costs associated with manufacturing tasks are made for many reasons. In principle, estimates are made of the resources required (For example, materials, labour and equipment), the cost of those resources and the time for which they will be used. From these factors, an estimate of the costs of carrying out a manufacturing process is made. 

b. Price skimming, penetration pricing 

Skimming is usually employed to reimburse the cost of investment of the original research into the product commonly used in electronic markets when a new range, such as smartphones, are firstly dispatched into the market at a high price. This can be attributed to their need for the product outweighing their need for economics, a greater understanding of the product's value, or simply having a higher disposable income. This strategy is employed only for a limited duration to recover most of the investment made to build the product. 

Penetration pricing is a pricing strategy where the price of a product is initially set at a price lower than the eventual market price to attract new customers. The strategy works on the expectations that customers will switch to the new brand because of the lower price. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than to make profit in the short term. The price will be raised later once this market share is gained.

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