4.1 Revenue Analysis

REVENUE ANALYSIS
AND PRICING POLICIES
BY
DR. NITIN RANJAN, SBES
4. REVENUE ANALYSIS AND PRICING
POLICIES:
• Introduction,
• Revenue: Meaning and Types, Relationship between
Revenues and Price Elasticity of Demand,
• Pricing Policies, Objectives of Pricing Policies, Cost plus
pricing.
• Marginal cost pricing. Cyclical pricing. Penetration Pricing.
Price Leadership, Price Skimming. Transfer pricing.
REVENUE
• In economics, the income that a firm receives from

the sale of a good or service to its customers.
• The amount of money that a producer receives in

exchange for the sale proceeds is known as revenue.
• For example, if a firm gets Rs. 16,000 from sale of
100 chairs, then the amount of Rs. 16,000 is known
as revenue.
CONCEPT OF REVENUE:
TR, AR AND MR:
P Q.S TR AR MR
1 10 10=1×10
10 10 =10 /1
10 - 10 =10-0
2 9 18 =2×9
18 99 =18 / 2 8 8 =18-10
3 8 24 =3×8
24 8 =24 / 3 6 6 =24-18
4 7 28 = 4×7
28 77 =28 / 4 4 4 =28-24
5 6 30 = 5×6
30 66 =30 / 5 2 2 =30-28
6 5 30
30 = 6 x 5 55 =30 /6 0 0 =30-30
7 4 28
28 = 7×4 44 =28 /7 -2 -2 =28-30
RELATIONSHIP BETWEEN REVENUES
AND PRICE ELASTICITY OF DEMAND,
• Price elasticity of demand describes how changes in the price
for goods and the demand for those same goods relate. As
those two variables interact, they can have an impact on a
firm’s total revenue.
• Therefore, as the price or the quantity sold changes, those

changes have a direct impact on revenue.
If demand is . . . Then . . . Therefore . . .
A given % rise in P will be

% change in Qd is greater more than offset by a larger
Elastic
than % change in P % fall in Q so that total
revenue (P times Q) falls.
A given % rise in P will be

% change in Qd is equal to % exactly offset by an equal %
Unitary
change in P fall in Q so that total revenue
(P times Q) is unchanged.
A given % rise in P will

% change in Qd is less than cause a smaller % fall in Q so
Inelastic
% change in P that total revenue (P times Q)
rises.
PRICING POLICIES
• Pricing policy refers to how a company sets the prices

of its products and services based on costs, value,
demand, and competition.
• Pricing policy is essential for all companies as it

provides a guideline for creating profits and areas that
bring in losses.
OBJECTIVES OF PRICING POLICIES
(i) Price-Profit Satisfaction:

• The firms are interested in keeping their prices stable within
certain period of time irrespective of changes in demand and
costs, so that they may get the expected profit.
(ii) Sales Maximisation and Growth:
• A firm has to set a price which assures maximum sales of the
product. Firms set a price which would enhance the sale of the
entire product line. It is only then, it can achieve growth.
(iii) Making Money:
• Some firms want to use their special position in the industry
by selling product at a premium and make quick profit as
much as possible.
(iv) Preventing Competition
(v) Market Share
(vi) Survival
(vii) Market Penetration
(viii) Marketing Skimming: Many companies favour setting
high prices to ‘skim’ the market. With each innovation, it
estimates the highest price it can charge given the comparative
benefits of its new product versus the available substitutes.
• Factors Involved in Pricing Policy:
The pricing of the products involves consideration of the

following factors:
• (i) Cost Data.
• ADVERTISEMENTS:
• (ii) Demand Factor.
• (iii) Consumer Psychology.
• (iv) Competition.
• (v) Profit.
• (vi) Government Policy.
COST PLUS PRICING
• Cost plus pricing is a pricing method that attempts to ensure

that costs are covered while providing a minimum
acceptable rate of profit for the entrepreneur.
Cost-plus pricing is also known as markup

pricing. It's a pricing method where a fixed
percentage is added on top of the cost to produce
one unit of a product (unit cost) -- the resulting
number is the selling price of the product.
COST-PLUS PRICING FORMULA
• The cost-plus pricing formula is calculated by
• adding material, labor, and overhead costs and

multiplying it by (1 + the markup amount).
• Overhead costs are costs that can't directly be traced

back to material or labor costs, and they're often
operational costs involved with creating a product.
COST-PLUS PRICING EXAMPLE
• Let's say you started a retail clothing line and you need to calculate
the selling price for the jeans. Here are the costs to produce one pair
of jeans:
• Material costs: Rs. 10
• Labor costs: Rs. 30
• Overhead costs: Rs. 15
• The total cost adds up to Rs. 55.00. With a markup of 50%, the
formula would look like this:
• Selling Price = Rs. 55.00 (1 + 0.50)
• Selling Price = Rs. 55.00 (1.50)
• Selling Price = Rs. 82.50
• This gives you a selling price of Rs. 82.50 for each pair of jeans.
ADVANTAGES
1. It's simple to use.

• Using a cost-plus pricing strategy doesn't require extensive research.
You just need to analyze your production costs (e.g., labor, materials,
and overhead) and determine a markup price.
2. The price can be justified.
• The cost-plus pricing strategy makes it easy to communicate to
consumers why price changes are made. If a company needs to raise the
selling price of its product due to rising production costs, the increase
can be justified.
3. It provides a consistent rate of return.
• When calculated correctly, the cost-plus pricing should result in all costs
being covered. And you should expect a consistent rate of return due to
the markup percentage.
MARGINAL COST PRICING.
• In case of Marginal Cost Pricing considers the incremental

cost of production.
• Fixed cost is not taken into consideration.
• Marginal cost is the additional cost for producing additional
unit of output.
• In this method the price is related to marginal cost.
• The main difference between Full Cost Pricing and Marginal
Cost Pricing is that in Marginal Cost Pricing the fixed cost
component is not included.
• The Marginal Cost Pricing is useful in the short period
whereas Full Cost Pricing is mainly for the long period.
CYCLICAL PRICING
• Cyclical pricing refers to the pricing decisions of the firm

which are taken to suit the fluctuations in the business
conditions. To simplify decision making in response to the
alterations in the entire economic system, it is necessary for
the firm to have some kind of policy based on cyclical
price behaviour.
PENETRATION PRICING
PRICE LEADERSHIP
PRICE SKIMMING.
TRANSFER PRICING
• Transfer pricing is the setting of the price for goods and

services sold between controlled (or related) legal entities
within an enterprise. For example, if a subsidiary company
sells goods to a parent company, the cost of those goods paid
by the parent to the subsidiary is the transfer price.
THANKYOU

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REVENUE ANALYSIS

AND PRICING POLICIES

• In economics, the income that a firm receives from

• The amount of money that a producer receives in

• Therefore, as the price or the quantity sold changes, those

A given % rise in P will be

A given % rise in P will be

A given % rise in P will

• Pricing policy refers to how a company sets the prices

• Pricing policy is essential for all companies as it

(i) Price-Profit Satisfaction:

The pricing of the products involves consideration of the

• Cost plus pricing is a pricing method that attempts to ensure

Cost-plus pricing is also known as markup

• The cost-plus pricing formula is calculated by

• adding material, labor, and overhead costs and

• Overhead costs are costs that can't directly be traced

1. It's simple to use.

• In case of Marginal Cost Pricing considers the incremental

• Cyclical pricing refers to the pricing decisions of the firm

• Transfer pricing is the setting of the price for goods and

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