Price regulator’s costing and pricing methodology

AN organisation has various options for selecting a pricing method.

Prices are based on three dimensions that are cost, demand, and competition.

The organisation can use any of the dimensions or combination of dimensions to set the price of a product.

There are four major pricing methods used by various organisations as follows:

1. Cost based pricing;

2. Demand based pricing;

3. Competition based pricing; and

4. Other pricing methods (eg. value pricing, target return pricing, going rate pricing).

Being the price regulator in Fiji, the Fiji Commerce Commission (Commission) is mandated under the Commerce Commission Act 2010 (CCA2010) to fix and declare by order through the approval of the minister the maximum prices of goods and services subject to price control.

This is so because the commission intends to set price ceilings (maximum prices) for goods and services to ensure affordability while maintaining equitable returns in trade.

Commission’s adopted method of pricing

Part of the commission’s regulatory role is the imposition of price control on basic food items, hardware items, pharmaceutical products, petroleum products, stationery, motor vehicle and accessories, agriculture pesticides and fertiliser.

The commission has adopted the “cost-plus-pricing method” to set the maximum prices of regulated products and services.

It is the simplest method of determining the price of a product.

In cost-plus pricing method, a fixed percentage, also called mark-up percentage, of the total cost (as a profit) is added to the total into store cost to set the price.

The objective of cost-plus pricing methodology is to determine the maximum retail and wholesale price of products, ensuring the trader of the product to price goods and services in a manner that helps ensures all costs associated with the effort are covered in order to remain equitable.

This method determines the price of a product that uses direct costs, indirect costs and fixed costs. It calculates the cost of the product and then adds the allowable mark up stipulated in the relevant price control order.

The commission chooses the cost-plus pricing methodology in consideration of the needs in Fiji such as extending the pricing formula to account for actual overheads and the scale of business.

Costing and pricing applications

To review prices of price controlled products, importers and distributors are required by law under the CCA2010 and the subsidiary price control orders to submit to the commission all costing documents including fixed and variables for the determination of maximum wholesale and retail prices for the various trade locations in Fiji.

This is done on every consignments or shipment basis.

Given the frequency of shipments, it is expected that a frequent change in prices of the basic food items.

Once proper endorsement is obtained, the final calculated prices are published in a master price list circulated to all traders for implementation.

To ensure adherence and compliance by traders, the commission conducts monitoring exercises in the market through price surveillance, including price control inspections, consumer and trader awareness programs and processing of consumer complaints.

There are certain price controlled goods and services being reviewed periodically based on adopted benchmarks.

Some of the goods and services in this category includes pharmaceutical products, petroleum products and domestic inter-island shipping freight service charges.

* Next Week: Breaches under Commerce Commission Act 2010

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