Marketing Finance


A simple meaning of marketing is selling of goods/services.

Sales and Distribution Costs:

These are the costs incurred for selling and distribution of a product. Example of selling cost is advertisement cost, for distribution cost it is transportation cost.

A major source of revenue, for carrying smooth operations of an organization is through sale of goods. Generally a finance manager plans the future requirement of cash based on the sales volume. The person who is looking after the marketing aspects of an organization is called a marketing manager. The marketing manager plays a crucial role in achieving the firm’s objectives (i.e. maximization of shareholders’ wealth). In order to achieve this, a marketing manager should be able to identify and secure the most profitable segments. From this segment he should be able to get the best possible price, and has to make plans to beat the competitor’s strategies in that segment. A marketing manager has to make plans to reduce the sales and distribution costs in order to achieve the objective of a firm. The pricing of a product determines the sales revenue, which is the major Source of finance.

Pricing of products:

Price = Cost + Profit

Determining the price of a product is an important factor as it is the major source of revenue, out of which the various costs will be met and profits are realized. While deciding the price, a marketing manager has to decide the benchmark as

1) Competitors’ product
2) Actual costs incurred plus profit percentage
3) Pricing based on the market segment

Before deciding the benchmark a marketing manager has to know the type of market, basing on which a marketing manager has to adopt appropriate pricing technique.

Monopolistic Competition:

It is a combination of pure competition and pure monopoly. Where there are many firms but each is large enough to have some influence on the prices it charges for its product.

Oligopolistic Competition:

Under oligopoly there are few sellers. Oligopoly is often referred to as competition among few.

There are four types of markets:

1) Pure Competition
2) Pure Monopoly
3) Monopolistic Competition
4) Oligopolistic Competition

In pure competition there will be a number of buyers and sellers, thus the price is determined by the market because it is not possible for either buyer or seller to influence the market. In a monopoly market there will be one seller. Thus there will be no competition and the seller can charge as high a price as market can bear. In practice these two markets are non-existent. The fixing of price in monopolistic competitive markets is a complex procedure.

The process of pricing can be divided as,

1) Determining the base price
2) Adjusting the base price according to customer location, discounts offered etc.

Determination of Base Price:

The first step in the process of pricing is determination of the base price. The basic price is established basing on

Marginal cost:

The change in total cost when one more unit is produced

1) Full cost pricing
2) Conversion cost pricing
3) Marginal cost pricing
4) Return on Investment pricing
5) Pricing based on market considerations.

Full Cost pricing

In full cost pricing the total cost of the product is estimated, which includes production, marketing, distribution and finance costs. Certain profit percentage will be added to this cost to determine the price of the product.

Conversion Cost Pricing:

Under this method of costing the profit is taken as percentage of conversion costs, whereas in full cost pricing profit is taken as percentage of total cost.

Full Cost Pricing:
(in Rs)
Product A Product B
(per unit) (per unit)

Material cost 120 10
Labor 60 100
Administrative &
Selling expenses 20 90
Total cost 200 200
Markup @ 25% 50 50
Selling price 250 250

Conversion Cost Pricing

Product A Product B
(per unit) (per unit)
Rs Rs

Material cost 120 10
Conversion costs:
Labor 60 100
Administration & selling 20 80 90 190
Mark up @ 25% on
Conversion cost 20 47.5
Selling price 220 247.5

You can observe the cost of product A and product B by means of full cost pricing method is same i.e. Rs 250. But by using conversion cost pricing method the cost of product A is Rs 220 and cost of product B is Rs 247.5. This difference arises because for product A the conversion cost is Rs 80 and for product B the conversion cost is Rs 190.
Marginal Cost Pricing:

Marginal costs are additional costs that can be directly associated with a particular period. For example, XYZ company manufacturing domestic appliance wishes to set a price for its product. The company has a normal capacity of 10,000 units per year and the relevant cost data is as below.

Direct Material:

Consumption of material that can be directly related to a particular Product:

Direct labor

Labor costs that can be directly related to a particular product

Cost per unit
Direct material 500
Direct labor 200

The difference between revenue and variable cost which contributes to the fixed cost and profit:

The company incurs Rs 10 lakhs on fixed costs and wishes to earn a profit of Rs 20 lakhs during the current year.

The price to be changed will be calculated as follows:

Contribution required = Fixed Cost + Profit Margin

= Rs 30 lakhs

Contribution required per unit = 30,00,000 /10,000
= Rs 300

Price to be charged = Variable cost/unit + Contribution /unit

=Rs (700 + 300) = Rs 1000.

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