Pricing - Advise the company, on the right pricing mix/strategy.

Assignment Taken

Operations and Finance Department

Case Understanding

Manoj and Parth formed a Private Limited Company in Bengaluru, named, PM Clean Air Solutions Private Limited (PMCASPL). Both were Directors in the company with 50% equity stake with each of them. The Authorized capital of the company was Rs. 2,00,000/- (Rupees Two Lakhs) only. Initial Paid-up capital was Rs. 1,00,000/- (Rupees One Lakhs) only. Directors introduced Rs. 50,000/- each as initial capital in the company. After few months of company formation, both Directors, further invested Rs. 5,00,000/- each in the company. Salary of Field Executives: The 2 field executives were under management trainee in the company. Their training is now completed and they have been offered full time employment in the company with revised salary package. Their revised salary for both field executives now stands at: Rs. 40,000 pm. each SAIF capital agreed to invest INR 10 Cr in their project for a stake of 5% in equity. The judges/host appreciated their project a lot and was ready to invest INR 10Cr. The distribution of the total amount was INR 5Cr towards capital contribution for a dilution of 5% in equity and INR 5Cr as a Term Loan for a period of 3 years carrying ROI @12% p.a. PMCASPL has allocated total budget of INR 10 cr. for the financial year 2022-23. Consultancy expenses of Rs. 5,00,000/- pm. Heads Monthly cost Yearly Cost (Rs.) Salary of two Software Developer 150000 18,00,000 Salary of Web Designer 35000 4,20,000 Salary of Mobile App developer 80,000 9,60,000 Rent of Premises (Maximum seating capacity is for 10 people currently) 25,000 3,00,000 Salary of two Field Executives* 30,000 3,60,000 Two Directors Salary 1,00,000 12,00,000 TOTAL COST 4,20,000 50,40,000

BCS Solution Summary

We have started our new venture called PM Clean Air Solutions Private Limited and is very loon launching product called Pure Air Ultra 200. As a Head of Finance Department, firstly I need to see the budget which is allocated for the year 2022-23 and as per the budget I need to give budget allocations as per the departments i.e., Operations, IT, HR, Marketing. After allocation of the budget, I need to analyze fixed and variable cost to get cost of production per unit and need to find out break-even point of the unit.

Solution

• Total budget allocated for year 2022-2023 is 10 crore rupees only. 

• Here is the allocation of the budget departmental wise. 

Departments	Budget
Operations	4,45,00,000 Rs/-
HR	1,40,00,000 Rs/-
Marketing	2,00,00,000 Rs/-
It	1,50,00,000 Rs/-

• Here as we can see total budget allocation is 9,35,00,000 Rs/- only. 

• There are some fix expenses for the year 2022-23 I.e., Interest rate (60,00,000) 12@ pa. 

• Fees for consulting company is 5,00,000 Rs/-. 

The total and bifurcation of costing are as follows - 

Particulars	Amount in rupees
Fixed cost -
Rent	3,00,000.
Plant rent	40,00,000.
Machinery	20,00,000.
Warehouse rent	20,00,000.
Tools and appliance	30,000,
Salaries and wages -	1,27,80,000
Total Fixed cost -	2,11,10,000
Variable cost-
Raw material	3,00,00,000
Electricity	60,00,00
Total variable cost	3,60,00,000

 

• The capacity of our plant to produce units per year is 3,703 units pa. 

• Considering that we are producing in bulk the overall cost of raw material per unit is gone down due to bulk purchase. 

Here is the brief per unit cost to determine pricing strategy for our product. 

1. As we know the fixed cost is 83,30,000 Rs/- and the units per year produced is 3,703 units. 

2. So, to get total cost of product per unit = C (total cost) = TFC (total fixed cost) + TVC (total variable cost) / Number of Units, 

3. Substituting values.  C= 2,11,10,000+3,60,00,000/3703. 

= 15,422 Rs/- per unit 

4.The total selling price of our product is 27599 Rs/-. 

5.The reason for the keeping gross margin high is due to many factors such as inflation rate growing in India, shortages of semi-conductors, change in trend etc. To absorb such kind of external factors gross margin is high. 

6.As we have assumed that total sales per unit will be 3703 units per year and total fix cost per units is divided by 3703 but that would not be case in real life situation so to absorb that cost, we have priced our product with high margin. 

 

This are some Pricing strategies for Pure Air Ultra 200 we have taken into consideration- 

 

Cost-plus pricing 

Many businesspeople and consumers think that cost-plus pricing, or mark-up pricing, is the only way to price. This strategy brings together all the contributing costs for the unit to be sold, with a fixed percentage added onto the subtotal. As the above data clearly signifies fix and variable cost per unit which makes easy to value total cost of per unit of the product. 

Cost plus pricing is time saving and covers almost each and all expenses occur for the production of product. The major drawback of this pricing strategy is that the customer is not taken into consideration.   

 

Competitive pricing 

Competitive pricing is the process of selecting strategic price points to best take advantage of a product or service-based market relative to competition. This pricing method is used more often by businesses selling similar products since services can vary from business to business, while the attributes of a product remain similar.  

Our competitors are Dyson, Daikin, Philips etc. Which have similar pricing as ours but we are better than them due to the area covering capacity of Pure Air Ultra 200. Considering this as factor of advantage we have kept our prices near our competitors. 

Penetration pricing 

  In a market with numerous similar products and customers sensitive to price, a          significantly lower price can make your product stand out. You can motivate customers to switch brands and build demand for your product. As a result, that increase in sales volume may bring economies of scale and reduce your unit cost.  

Break even analysis of Pure Air Ultra 200 

• Population of India = 1.4 billion 

• Middle Class population of India = 28% of 1.4 billion (392million) 

• Upper Middle-Class Population of India = 3% of 392 million (11.76 million) (TAM) 

• People that want to buy that product = 40% of 11.76 (4.7 million) (SAM) 

• People that will buy the product = 10% of 4.7 million (4700k) (SOM) 

• Fixed cost = 2,11,10,000 Rs/- 

• Variable cost per unit = 9721 Rs/- 

• Break Even Point = Fixed Cost / (Selling Price-Variable Cost) 

=2,11,10,000 / (17878) 

= 1,180 units. 

• The break-even point can be achieved as SOM is higher. 

• Break-even analysis tells you how many units of a product must be sold to cover the fixed and variable costs of production. 

 

Future Predictions - 

1. Every year we are expecting our market share to grow by 10 – 12 % as the overall market is increasing by 36.4% every year. 

1. If we achieve to sell 3703 units for year 2022-23 then total revenue generated will be 10,21,99,097 Rs/-. 

Assumptions -   

1. That we will sale at least 3703 units of Pure Air Ultra 200 air purifier this year (2022-23). 

1. All fixed cost above mention is on basis of estimation and not real. 

Conclusion

Being head of finance department it is very important to reduce fix cost as to reduce break even point of the product and to gain maximum profit for the organization. As we can see that to get over break even point is 1180 units which is estimated to get sold till 4 months after launch of the product due to competitive pricing strategy. Considering assumptions that we have taken into consideration total revenue generation for year 2022-23 is 10,21,99,097 Rs/-.

Attached File Details