DEPRECIATION

Depreciation is the diminution in the financial value of an asset owing to

wear and tear, efflux of time, obsolescence or similar causes.
Depreciation is a permanent continuing and gradual shrinkage in the value
of a fixed asset. It is also defined as the permanent and continuous
diminution in the quality, quantity or the value of assets.
The gradual decrease in the value of an asset because of any cause.
The amount of depreciation is charged on the basis of cost of machine,
life of the assets and the cost of replacement.

TYPES OF DEPRECIATION:-
(1) STRAIGHT LINE METHOD: Straight-line depreciation is the simplest and most-
often-used technique, in which the company estimates the salvage value of the asset at the end of
the period during which it will be used to generate revenues (useful life) and will expense a portion
of original cost in equal increments over that period. The salvage value is an estimate of the value
of the asset at the time it will be sold or disposed of; it may be zero or even negative. Salvage
value is also known as scrap value or residual value

(2) DOUBLE DECLINING DEPRECIATION METHOD: Depreciation

methods that provide for a higher depreciation charge in the first year of an asset's life and
gradually decreasing charges in subsequent years are called accelerated depreciation methods.
This may be a more realistic reflection of an asset's actual expected benefit from the use of the
asset: many assets are most useful when they are new. One popular accelerated method is the
declining-balance method. Under this method the Book Value is multiplied by a fixed rate.

(3) WDV OR DIMINISHING METHOD: Written down value, applicable to

machines that have high rates of depreciation in the initial year or two, and later taper it e.g.
a car, is a usable method.

• Under this method, depreciation is charged at a fixed rate every year,

ON THE REDUCING BALANCE A certain percentage is applied to the
previous year’s book value, to arrive at the current year’s depreciation/ book
value, WHICH SHOWS A DECLINING BALANCE, WEIGHTED FOR
EARLIER YEARS, AND LOWER AND LOWER FOR LATER YEARS, as the
machine grows older.
• Accelerates depreciation taken in early years. Reduces the amount taken in
later years. Ignores salvage value; starts with depreciable base = asset cost.
(4) SUM OF YEAR DIGIT METHOD: Sum-of-Years' Digits is a
depreciation method that results in a more accelerated write-off than
straight line, but less than declining-balance method. Under this method
annual depreciation is determined by multiplying the Depreciable Cost by
a schedule of fractions.

(5) Activity depreciation(Machine hour rate method):

Activity depreciation methods are not based on time, but on a level of
activity. This could be miles driven for a vehicle, or a cycle count for a
machine. When the asset is acquired, its life is estimated in terms of this
level of activity. Assume the vehicle above is estimated to go 50,000
miles in its lifetime. The per-mile depreciation rate is calculated as:
($17,000 cost - $2,000 salvage) / 50,000 miles = $0.30 per mile. Each
year, the depreciation expense is then calculated by multiplying the rate
by the actual activity level

(6) Units-of-Production Depreciation Method: Under the

Units-of-Production method, useful life of the asset is expressed in terms
of the total number of units expected to be produced. Annual depreciation
is computed.
a.production unit method= value of asset/number of units of production
b.production hour method=value of asset/number of production hours

(7) Units of time depreciation: Units of Time Depreciation is

similar to units of production, and is used for depreciation equipment used
in mine or natural resource exploration, or cases where the amount the
asset is used is not linear year to year.A simple example can be given for
construction companies, where some equipment is used only for some
specific purpose. Depending on the number of projects, the equipment
will be used and depreciation charged accordingly.

8)Revaluation method: Provides for depreciation by means

Of periodic charges,each of which is equal to the difference between the values
assigned to the asset at beginning and end of each year.
For example: If the value of a machine on april 1,1974 is rs.7,000/- and on march
31,1975,it is revalued as rs.6,000/-
Then the depreciation period is Rs.7000-6000=Rs.1000
Revaluation method is commonly used for loose tools,
Laboratory glass wares,farmer’s live stock,plant used in contract work..etc.

9).Annuity Method:It considers original cost and interest on

the written down value of the fixed asset.
The depreciation charge is composed
of the amount credited to the fund and
the interest on the book value of the
asset at the end of the period..
 The investment in the asset is
regarded, first, as the amount of the
salvage/scrap value which earns interest, and
second, an investment in an annuity to
be equal to the periodic payments.
 “compound interest method of
depreciation”

10. SINKING FUND METHOD

Setting up a sinking fund in which Money accumulates to replace the existing asset
at the proper time. The method charges annually to revenue account such sum as, with
compound interest, will amount to the net cost of the asset at the end of its useful life. At the
end of useful life of the asset, the total amount in depreciation plus compound interest should
Become equal to the original cost of the fixed asset.

11. INSURANCE POLICY METHOD

The method involves charging depreciation and then investing in to insurance policies.
Each year sum charged is paid as a premium to an insurance company. This method is
similar to sinking fund method.we can purchase another asset ,when the policy matures.

METHODS OF DEPRECIATION (how to calculate):--

O = original cost of the asset
 S = Scrap or salvage value
 W = wearing value
 n = useful or economic life
of an asset in yrs, months & the like
 R = depreciation charge per year
 t = given year or date
 BV = Book value
 r = rate of depreciation
 Scra p valu e/Salva ge/Trade-in
value
 An asset that can no longer be
used for the purpose for which it
was purchased
 Wear in g va lue/ total depreciationde pre cia tion
The difference between the
original cost and the scrap
value; W = O - S
 Book v alue of the asset at the end of the period

(1) STRAIGHT LINE METHOD

(2) WDV OR DIMINISHING METHOD
(3) SUM OF YEAR DIGIT METHOD
(4) DOUBLE DECLINING DEPRECIATION METHOD

Explanations

(1) Straight line method WDV or diminishing method :

(a)For Example: Say a machine costs Rs. 10,000
and Rs. 1,000 (as additional set-
up/installation/maintenance expenses) = Rs 11,000
but we anticipate/guess its Kabari (Scrap Value) at
Rs. 3,000 at the end of its useful life, of say, 10 yrs,

we get:

Cost of Machine + Installation + Directly

Associated Costs = Total Cost
Total Cost - Salvage Value (At end of 10 yr.
Period) = Depreciable base

10,000 + 1,000 =11000 (Total cost)

11000 – 3,000 = 8,000 as the Depreciable Base

Depreciable Base = Rs. 8,000, Spread out over 10

yrs = Rs. 8000/10(Yrs) = Rs 800/- depreciation per
year.

(b) if an assets has been purchased for Rs. 10000 ans it will have a
scrap value of Rs 1000 at the end of its useful llife of 10 year, the
amount of depreciation is to be charged every year over the
effective life of the assets will be computed as follows:
Depreciation= 10000 – 1000/10 years.
RS 900 each year or 9%
(2) Sum of year digit method :
under this method, the numbers 1, 2, 3, …..n (where n is useful
economic life) are added and depreciation rate is calculated as
follows:
Year depreciation rate

1 n/sum of n
2 (n-1)/sum of n
3 (n-2)/sum of n
4 (n-3)/sum of n
5 (n-4)/sum of n
6 *
7 *
Where n = 1+2+3+4+5……..+n.
These rates are then applied to the net cost. For a machine of 10
years economic life and Rs. 100000, the depreciation for each is
computed as follow:
Year depreciation Rate. Annual dep. Net book value

1 10/55 18182 81818

2 9/55 16364 65454
3 8/55 14545 50909
4 7/55 12727 38182
5 6/55 10909 27273
6 5/55 9091 18182
7 4/55 7273 10909
8 3/55 5455 5454
9 2/55 3636 1818
10 1/55 1818 1818
(b) if the cost of an asset is RS 10000 and it has an effective life of
5 year. The amount of depreciation to be written off each year will
be computed as follows:
1st year 5/1+2+3+4+5 * 10000 = 3333
2nd year 4/15 * 10000 = 2666
rd
3 year 3/15 * 10000 = 2000
th
4 year 2/15 * 10000 = 1333
th
5 year 1/15 * 10000 = 667

(3) Double declining depreciation method:

EXAMPLE OF DOUBLE DECLINING BALANCES METHOD:

[The Double Declining Method takes an amount (usually double, i.e. 200% of the
amount that we take in the Straight Line Method) and applies it to the book value of
an asset each year]:

Suppose the asset costing Rs.16,000 has AN ESTIMATED USEFUL LIFE OF 5

YEARS, the depreciation would be calculated as follows:

(b) A plant having a scrap value of RS 10000 and life of 5 years

was purchased for Rs 10000 in Jan. 1990. You required calculating
amount of depreciation for each of the year according to the double
declining method.
Sol.
According to the fixed installment method (without considering
salvage value) depreciation would amount to Rs 2000 i.e. 10000/5
years each year. The rate of depreciation therefore comes to 20 %.
In case of double declining method rate of depreciation would be
twice of this rate i.e. 40%.
Amount of depreciation for each year would therefore be
Year book value in the beginning amt. of depreciation.
1 10000 4000
2 6000 2400
3 3600 1440
4 2160 860
5 1300 300

(4) WDV or diminishing method:

Under this method depreciation is calculated by applying
depreciation rate to the net book value of the assets at the
beginning of that year rather than to the original cost.
For a machine whose acquisition cost is Rs. 100000, useful
economic life is 10 year and the rate of depreciation is 20 %,
the depreciation under WDV method will be as follow:

Year annual depreciation net book value

1 100000*.20= 20000 80000

2 80000*.20= 16000 64000
3 64000*.20= 12800 51200
4 51200*.20= 10240 40960
5 40960*.20= 8192 32768
6 32768*.20= 6553.6 26214
7 26214*.20= 5242.88 20971.52
8 20971*.20= 4194.3 16777.22
9 16777*.20= 3355.44 13421.78
10 13421*.20= 2684.35 10737.43

(b)
 If the cost of an asset is RS 10000 and residual value RS
1296, economic life 4years and the rate of depreciation
would be 40% calculated as follows:
Depreciation rate = 1- 4 (1296/10000) ^1/2

= 1 – 6/10
= 40%.

Classification of cost

Classification of cost is the process of grouping the components

of cost
under a common designation on the basis of similarities of nature,
attributes or
relations. It is the process of identification of each item and the
systematic
placement of like items together according to their common
features. Items
grouped together under common heads may be further classified
according to
their fundamental differences. The same costs may appear in several
different
classifications depending on the purpose of classification.

Cost is classified normally in terms of a managerial

objective. Its
presentation normally requires sub-classification. Such sub-
classification may
be according to nature of the cost elements, functional lines,
areas of
responsibility, or some other useful break-up. The
appropriate sub-classification
depends upon the uses to be made of the cost report.
6. Classification of Costs
6.1 By Nature of expense:

Costs should be gathered together in their natural groupings such

as
 material, labour and other expenses. Items of costs differ on the
basis of their
nature. The elements of cost can be classified in the following three

categories : i) Material ii) Labour iii) Expenses

Cost
Classification by nature

1.Material
2.Labour
3.Expenses
6.1.2 Material Cost is the cost of material of any nature used for the
purpose of production of a product or a service.

Material cost includes cost of procurement, freight inwards, taxes &

duties, insurance etc directly attributable to the acquisition. Trade discounts,
rebates, duty drawbacks, refunds on account of modvat, cenvat, salex tax
and
other similar items are deducted in determining the costs of material

6.1.4. Labour Cost means the payment made to the employees,

permanent or
temporary, for their services.
6.1.5 Labour cost include salaries and wages paid to permanent employees,
temporary employees and also to employees of the contractor. Here, salaries
&
wages include all fringe benefits like Provident Fund contribution, gratuity,
ESI, overtime, incentives, bonus , ex-gratia, leave encashment, wages for
holidays and idle time etc

6.1.6 Expenses are other than material cost or labour

cost which are
involved in an activity.
6.1.7 Expenditure on account of utilities, payment for bought out services, job
processing charges etc. can be termed as expenses.

Cost
Classification by relation to Cost Centre
_____________________________

Direct Indirect
____│______________ │
│ │ │ ____________________
Material labour expenses │ │ │
 Material labour
expenses

Direct cost has three components – direct material cost, direct

labour
cost and direct expenses and indirect cost has three components-
indirect
material, indirect labour cost and indirect expenses. Sum of all
direct costs is
called prime cost

Raw materials consumed for production for a product or service which

are identifiable in the product or service form the direct material cost. Direct
Material cost includes cost of procurement, freight inwards, taxes & duties,
insurance etc directly attributable to the acquisition. Trade discounts,
rebates,
duty drawbacks, refunds on account of modvat, cenvat, salex tax and other
similar items are deducted in determining the costs of direct material

Examples of direct expenses are

expenses for special moulds required in a particular cost centre
hiring charges for tools and equipments for a cost centre
royalties in connection to a product
Job processing charges etc
6.2.8 Indirect Material is the cost of material which can not be
directly
allocable to a particular cost centre or cost object.
6.2.9 Materials which are of small value and can not be identified in or
allocated to a product/service are classified as indirect materials. Examples :
Consumable spares and parts
Lubricants

By functions/activities:
6.3.1 Costs should be classified according to the major functions for
which
the elements are used into the following four major functions :
Production;
Administration;
Selling;
Distribution; and
Research & Development Expenditure

Production Cost is the cost of all items involved in the production of

a
product or service. It includes all direct costs and all indirect costs
related to
the production.( Exhibit 1)
6.3.3 Production overhead is the indirect costs involved in the
production
process.
 Production overhead is also termed as factory overhead or manufacturing
overhead.
Examples of Production overhead :
_ Salaries for staff for production planning, technical supervision,
factory administration etc
_ normal idle time cost
_ expenses for stores management
_ security expenses in the factory
_ labour welfare expenses
_ dispensary and canteen expenses
_ depreciation of plant and machineries
_ repair and maintenance of factory building and plant &
machineries
_ insurance
_ quality control etc

Costs are classified based on behaviour as fixed cost, variable cost

and
semi-variable cost depending upon response to the changes in the
activity
levels.

Fixed Cost is the cost which does not vary with the change in the
volume of activity in the short run. These costs are not affected by
temporary fluctuation in activity of an enterprise. These are also
known as
period costs.
6.4.3 Examples for fixed cost : salaries, rent, audit fees, depreciation etc.
6.4.4 Variable Cost is the cost of elements which tends to directly
vary with
the volume of activity. Variable cost has two parts – (a) Variable
direct cost;
and (b) Variable indirect costs. Variable indirect costs are termed as
variable
overhead.
6.4.5 Examples of variable cost are materials consumed, direct labour, sales
commission, utilities, freight, packing, etc

6.4.6 Semi Variable Costs contain both fixed and variable elements.
They are
partly affected by fluctuation in the level of activity.
6.4.7 Examples of semi-variable cost : Factory supervision, maintenance,
power etc

For Management Decision Making

6.5.1 Costs are classified for the purpose of management decision
making
under different circumstances as under :

Marginal Cost
Differential Cost
Opportunity Cost
Replacement Cost
Relevant Sunk
Cost
imputed Cost
Normal and
Abnormal Cost
Avoidable and
Un-avoidable Cost

Marginal cost is the aggregate of variable costs, i.e. prime cost plus
variable overhead. Marginal cost per unit is the change in the
amount at any
given volume of output by which the aggregate cost changes if the
volume of
output is increased or decreased by one unit.
6.5.3 Marginal cost is used in Marginal Costing system. For determining
marginal cost, semi-variable costs, if any, are segregated into fixed and
variable
cost. Then, variable costs plus the variable part of semi-variable costs is the
total marginal cost for the volume of production in consideration.
Example :
A. Production 45,000 units
Fixed Cost Variable Cost
B. Cost Rs lakhs Rs lakhs
1. Material cost 4.50
2. Labour cost 2.45
3. Fixed Cost 4.80 -
4. Variable Production & Selling overhead 2.30
5. Semi-variable Cost 3.20 2.00
( after segregation fixed and variable part)
----------------
C. Total Marginal Cost 11.25
--------------
D. Marginal cost per unit Rs 25.00
6.5.4. Differential Cost is the change in cost due to change in
activity from
one level to another.

6.5.5 Differential Cost is found by using the principle which highlights the
points of differences in costs by adoption of different alternatives. This
technique is used in export pricing, new products and pricing goods sought to
be promoted in new markets, either within the country or outside.
6.5.6 The algebraic difference between the relevant cost at two levels of
activities is the differential cost. When the level of activity is increased, the
differential cost is known as incremental cost and when the level of activity is
decreased, the decrease in cost is known as decremental cost
6.5.7 Opportunity Cost is the value of the alternatives foregone by
adopting a
particular strategy or employing resources in specific manner.
6.5.8 It is the return expected from an investment other than the present
one.
The opportunity cost is considered for selection of a project or justification of
investment, studying viability of an investment option. Example : A machine
is
currently being used to produce product P. It can also be used to produce
product Q which can fetch Rs 60,000 profit. Then the opportunity cost of
using
the machine is Rs 60000.

6.5.9 Replacement Cost is the cost of an asset in the current market

for the
purpose of replacement.
6.5.10 Replacement cost is generally used for determining the optimum time
of
replacement of an equipment or machine in consideration of maintenance
cost
of the existing one and its productive capacity.

6.5.11 Relevant Costs are costs relevant for a specific purpose or

situation.
6.5.12 In the context of decision making relating to a specific issue, only
those
costs which are relevant are considered. A particular cost item may be
relevant
in a decision making and may be irrelevant in some other decision making
situation. For example, present depreciated cost of machine is relevant in
case
of decision of its sale but it is irrelevant in case of decision of its replacement.

6.5.13 Imputed Costs are hypothetical or notional costs, not

involving cash
outlay, computed only for the purpose of decision making.
6.5.14. In economics, ‘imputed’ indicates an ascribed or estimated value
when
there is no criteria of absolute monetary value for such purpose. In national
income estimation wages of housewives are imputed. Similarly, in farming
operations, the wages or salaries of owner are imputed. Imputed costs are
similar to opportunity costs. Interest on internally generated fund,
which is not
actually paid is an example of imputed cost.

6.5.15 Sunk Costs are historical costs which are incurred i.e. ‘sunk’
in the
past and are not relevant to the particular decision making problem
being
considered.
6.5.16 Sunk costs are those that have been incurred for a project and which
will
not be recovered if the project is terminated. While considering the
replacement of a plant, the depreciated book value of the old asset is
irrelevant
as the amount is a sunk cost which is to be written off at the time of
replacement.

6.5.17 Normal Cost is a cost that is normally incurred at a given

level of
output in the conditions in which that level of output is achieved.
6.5.18 Normal cost includes those items of cost which occur in the normal
situation of production process or in the normal environment of the business.
The normal idle time is to be included in the ascertainment of normal cost.

6.5.19 Abnormal Cost is an unusual or a typical cost whose

occurrence is
usually irregular and unexpected and due to some abnormal
situation of the
production.
6.5.20 Abnormal cost arises due to idle time for some heavy break down or
abnormal process loss. They are not considered in the cost of production for
decision making and charged to profit & loss account.

6.5.21 Avoidable Costs are those costs which under given conditions
of
performance efficiency should not have been incurred.
6.5.22. Avoidable costs are logically associated with some activity or situation
and are ascertained by the difference of actual cost with the happening of the
situation and the normal cost. When spoilage occurs in manufacture in
excess of
normal limit, the resulting cost of spoilage is avoidable cost. Cost variances
which are controllable may be termed as avoidable cost.

6.5.23 Unavoidable Costs are inescapable costs which are essentially

to be
incurred, within the limits or norms provided for. It is the cost that
must be
incurred under a programme of business restriction. It is fixed in
nature and
inescapable.
.

6.7 Classification by time

6.7.1 A cost item is related to a specific period of time and cost can
be
classified according to the system of assessment and specific
purpose as
indicated in the following ways:
Cost
Classification by time
1.Historical
2.Pre-determined
2.Standard
3.Estimated

6.7.2 Historical Costs are the actual costs of acquiring assets or

producing
goods or services.

6.7.3 They are ‘postmortem’ costs ascertained after they have been incurred
and they represent the cost of actual operational performance. Historical
costing system follows a system of accounting to which all values ( in
revenue
and capital accounts) are based on costs actually incurred or as relevant from
time to time.

6.7.4 Pre-determined Costs for a product are computed in advance

of
production, on the basis of a specification of all the factors affecting
cost and
cost data. Pre-determined costs may be either standard or
estimated.
6.7.5 Standard Costs : A predetermined norm applied as a scale of
reference
for assessing actual cost, whether these are more or less. The
standard cost
serves as a basis of cost control and as a measure of productive
efficiency
when ultimately posed with an actual cost. It provides management
with a
medium by which the effectiveness of current results is measured
and
responsibility of deviation placed.

6.7.6. Standard costs are used to compare the actual costs with the standard
cost
with a view to determine the variances, if any, and analyse the causes of
variances and take proper measure to control them.

6.7.7 Estimated Costs of a product are prepared in advance prior to

the
performance of operations or even before the acceptance of sale
orders.
6.7.8 Estimated cost is found with specific reference to product in question,
and
activity level of the plant. It has no link with actual and hence it is assumed to
be less accurate than the standard cost.

3.Pricing Policies and Strategies

 MEANING OF PRICE & PRICING
According to Kohler a price as-
“ the money Consideration asked for on offered in exchanges for a
specified unit of goods on service ”

Pricing is the function of determining the value of a

product on service in monetary terms.

1. Cost Based pricing:

A)COST PLUS PRICING

The prices are based upon total cost of sales so as to cover both
fixed as well as variable cost and in addition to provide for certain
desired margin of profit.
It is also known as full cost, cost plus and absorption
costing method.

‫ﻊ‬ It provides a reasonable rate of return to the firm.

‫ﻊ‬ It ensures stability in the pricing policy & selling prices can be
justified to the customer.
B)RETURN ON INVESTMENT:
Under this method, price of a product is fixed to give a desired rate
of return on capital employed. The price is determined by adding a
certain percentage of capital employed to the total cost. The markup
% of profit may vary from industry to industry. This method of
pricing is popular because it recognizes full cost of the product plus
a reasonable return on investment.

C)MARGINAL COST PRICING:

Under normal circumstances, the prices are based upon
total cost of sales so as to cover both fixed as well as variable cost
and addition to provide for certain desired margin of profit. But
prices may also be fixed on the basis of marginal cost by adding a
sufficient high margin to marginal (variable) cost so as to cover the
fixed cost and profit.
However under other circumstances, products may
have to be sold at price below the total cost.

D)TRANSFER PRICES:
A transfer price is a price used to measure the price of
goods and services furnished by a profit centre to other
responsibility centers within a company.
there are various transfer pricing methods in use. This
methods are generally based on either cost or market price. The
various intra company transfer pricing methods are as follows:
1) cost price
2) cost plus a normal markup
 3) incremental cost
4) shared profit relative to the cost
5) market price
6) standard price
7) negotiated price
8) dual or two way price

2.COMPETITION BASED PRICING

A)Customer value pricing

Organization charge very low
price to create special customer
value for the product.
 Adopted by those organizations
who have substantial width
and depth in their product line
or mix.

B)Pricing above competition

 If the product can be
differentiated to some extent,
it may price slightly above the
prevailing market price.
 If the marketer has higher image
or goodwill, it can afford to set
the price above competitive
level.
C) Pricing below competition
It is popular in highly
competitive market.
 Organizations believe that more buyers can be attracted by the

lower price .
D)Product Bundle Pricing.
Here sellers combine several products in the same package. This also serves to move
old
stock. Videos and CDs are often sold using the bundle approach.
E)Promotional Pricing.
Pricing to promote a product is a very common application. There are many
examples of
promotional pricing including approaches such as BOGOF (Buy One Get One Free).

F)GOING RATE PRICING:

MATCHING COMPETITORS PRICING

G)LOSS LEADERS: TO REDUCE THE PRICE IN PARTICULAR PRODUCT

EXAMPLE:Super markets often drop the price on well known brands to stimulate
additional store traffic.
H)List prices: Established prices normally quoted to potential buyers

I) Leader pricing:Set by the leaders

3.PRICING BASED ON ECONOMIC CONDITION

 Geographic Considerations
 FOB (free on board) plant or FOB origin: Price
quotation that does not include shipping charges.
Buyer pays all freight charges to transport the
product from the manufacturer
 Freight absorption: system for handling
transportation costs under which the buyer may
deduct shipping expenses from the costs of goods
Global Considerations and Online Pricing

 International markets are subject to external influences

such as regulatory limitations, trade restrictions,
competitor’s actions, economic events, and the global
status of the industry
 The effect the exchange rate can have on international
trade can be significant. It is important that pricing of
products take exchange rates into account.
Traditional Global Pricing Strategies
 Standard Worldwide: Pricing strategy in which exporters
set standard worldwide prices for products, regardless of
their target markets
 Dual Pricing: Pricing strategy that distinguishes between
domestic and export sales, and maintains a distinct set of
prices for each
 Market Differentiated: Flexible pricing strategy that sets
prices according to local marketplace and economic
conditions

4.PRICING STRATEGIES:
A)Penetration Pricing.
. The price charged for products and services is set artificially low in order to gain market
share. Once this is achieved, the price is increased. This approach was used by Telecom and Sky
TV

B)Price Skimming.
Charge a high price because you have a substantial competitive advantage. However, the
advantage is not sustainable. The high price tends to attract new competitors into the
market, and the price inevitably falls due to increased supply. Manufacturers of digital
watches used a skimming approach in the 1970s. Once other manufacturers were tempted
into the market and the watches were produced at a lower unit cost, other marketing
strategies and pricing approaches are implemented.
Premium pricing, penetration pricing, economy pricing, and price skimming are the four
main pricing policies/strategies. They form the bases for the exercise. However there
are other important approaches to pricing.
C)Psychological Pricing.
This approach is used when the marketer wants the consumer to respond on an emotional,
rather than rational basis. For example 'price point perspective' 99 Rs.

D)Product Line Pricing.

Where there is a range of product or services the pricing reflect the benefits of parts of the
range. For example car washes. Basic wash could be Rs.100/-, wash and wax Rs.200/-, and the
whole package Rs.300/-

E)Value Pricing.
This approach is used where external factors such as recession or increased competition force
companies to provide 'value' products and services to retain sales e.g. value meals at
RESTAURANTS.