Pricing methods

Methods Of Pricing
1. Value Based Pricing
2. Cost Based Pricing
3. Market/Competitor Based Pricing
4. Customer Demand Based Pricing

1. Value Based Pricing(value optimized
pricing)
• It is a pricing strategy which sets prices
primarily, but not exclusively, according to the
perceived or estimated value of a product or
service to the customer rather than according
to the cost of the product or historical prices.
• when products are sold based on emotions
(fashion),
• In shortages (e.g. drinks at open air festival on
a hot summer day) or for complementary
products (e.g. printer cartridges, headsets for
cell phones)

1. Value based Pricing
• Value-based pricing in its literal sense implies basing
pricing on the product benefits perceived by the
customer instead of on the exact cost of developing
the product. For example, a painting may be priced as
much more than the price of canvas and paints: the
price in fact depends a lot on who the painter is.
Painting prices also reflect factors such as age, cultural
significance, and, most importantly, how much benefit
the buyer is deriving. Owning an original Dalí or Picasso
painting elevates the self-esteem of the buyer and
hence elevates the perceived benefits of ownership

Example
• The fashion industry is an example of a sector
where value-based pricing is common. If a
particular designer becomes popular, the
designer can charge more for the goods they
create than if they were not as popular.

1. Value Based Pricing
• Value > Price > Cost
• Price > Value > Cost
• Price > Cost > Value
• Price = Value > Cost

• It is an approach which uses the total cost of
producing the product or service and adding
some amount to allow the business needs to
make a profit.
• For example, in a retail store, a person buys
something for $5, and he/she sells it for $10 to
customer, this is called cost-based pricing.

• Mark-up/ Cost plus Pricing
• Full Cost/ Absorption Cost Pricing
• Incremental Cost/ Marginal Cost Pricing
• Break Even Point Pricing
• Target / Rate of Return Pricing

Cost Plus Pricing/Mark-up
• Goods which are very intensely traded (e.g. oil
and other commodities), or which are sold to
highly sophisticated customers in large
markets (e.g. automotive industry) are usually
sold using cost-plus pricing

Absorption Cost
• Absorption costing, also known as full
absorption costing, or full costing, is a costing
method that attempts to allocate all the costs
of production, including overhead expenses,
to the end product or service.
• Companies may use absorption costing if they
wish to gain a full understanding of the extent
to which their costs are covered by their sales
income.

Absorption Cost
• for example, a factory that is producing a
single end product that sells for $50,000 each.
The direct costs in connection with
manufacturing each unit of the product may
have been $10,000 for materials and $20,000
for direct labor and factory overheads $10,000
then it leads to have profit of $10,000.

Incremental Cost Pricing
• Method of pricing a good or service in which
the price of a unit produced (after all fixed
costs of production have been met) is based
on variable costs (and not on the total cost)
incurred in its production.

Incremental cost Pricing
• For example, a company that has been making packets
of biscuits, with 8 biscuits per packet, launches a new
product, that is a 15-biscuits packet.
• The R&D, machinery, land on which the machinery (or
factory) is remains same.
• So the fixed cost, like the rent of the land, the initial
cost of setting up the machinery and that incurred in
R&D of the biscuit remain same. The variable cost
changes. This includes the cost of the extra volume of
ingredients, bigger packets, extra oil/electricity used to
run the machinery.

Break Even Point Pricing
• Breakeven price is the amount of money for
which an asset must be sold to cover the costs
of acquiring and owning it. It can also refer to
the amount of money for which a product or
service must be sold to cover the costs of
manufacturing or providing it.

Target Rate of Return Pricing
• iPod

3. Market/ Competitor Based Pricing
• Going Rate/ Parity Pricing
• Pricing Below the Level of Competition/
Discount Pricing
• Pricing Above the Level of Competition/
Premium Pricing
• Tender Pricing/ Sealed Bid/ Competitive
Bidding

1. Going Rate Pricing
• The Going-Rate Pricing is a method adopted
by the firms wherein the product is priced as
per the rates prevailing in the market
especially on par with the competitors.

4. Customer Demand Based Pricing
1. ‘What the Traffic can Bear’ pricing
2. Skimming Based Pricing
3. Penetration Based Pricing

1. “What the Traffic can Bear” Pricing
• A practice in business whereby a company
charges an amount that might seem excessive,
yet is still within the range of what customers
will pay for a product or service.

2. Skimming Based Pricing
• Price skimming is a pricing strategy in which a
marketer sets a relatively high initial price for
a product or service at first, then lowers the
price over time. It is a temporal version of
price discrimination/yield management.

3. Penetration Pricing
• Penetration pricing is a pricing strategy where
the price of a product is initially set low to
rapidly reach a wide fraction of the market
and initiate word of mouth. The strategy
works on the expectation that customers will
switch to the new brand because of the lower
price.

Pricing methods

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Pricing methods