Methods of Pricing | Pricing Strategy Types

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In an organisation, price is one significant factor in attaining high market share. Profit maximization, high market share, to attain a status quo by stable price and meeting competition in the market are the main objective of pricing objective.
So, methods of pricing and pricing strategies is one of the critical tasks for a marketer.

Majorly there are three methods of pricing determination strategy

  1. Cost based pricing
  2. Break-Even Concept
  3. Pricing related to the market.

Price setting is influenced by market conditions and changes as per marketing conditions and also with changing environmental factors.

Price is the amount of money paid by the buyer for acquiring a product or service. Marketing management is about placing the right product, at the right price, at the right place, at the right time.

Methods-of-Pricing-Geektonight
Methods of Pricing

Below is the list of all the Pricing Strategy Types:

1. Cost based Pricing

  • Using the cost of production as the basis for pricing a product.
  • Here the selling price of product a will be the cost to produce it.
  • It includes:- Direct and indirect costs & Additional amount to generate profit.

Below price method/strategies are commonly used under cost-based pricing

Mark-up Pricing

In mark-up pricing, the selling price of the product is fixed by adding a particular margin or mark up to its cost.

Generally, distributive trade and marketing firms, who do not have any manufacturing of their own, prefer this method. The slower the turnaround of the product, the larger is the mark-up and vice-versa. It is also known as Cost Plus Pricing.

Full Cost Pricing

Full Cost Pricing is based on the estimated unit cost of the product with the normal level of production and sales and usually adopted by manufacturer firms. A profit margin is added to this unit cost.

This methods of pricing use standard costing techniques and work out the variable cost and fixed costs involved in manufacturing, selling and administering the product. The selling price of the product is decided by adding the required margin towards profit to such total costs. It is also known as Absorption Cost Pricing.

The advantage of full-cost pricing is that as long as the market consume the production at the determined price, the firm is assured of its profits.

The disadvantages of full-cost pricing is that the method does not take cognizance of the demand factors at all and relies excessively on standard costing and normal level of production and sales.

Read: Marketing Mix – 4ps: Definition, Example, Importance

Marginal Cost Pricing

Marginal-cost pricing involves basing the price on the variable costs of producing a product, not on the total costs.

Fixed costs: capital equipment repayments, factory rental, and permanent staff salaries, short or medium term, remain unchanged regardless of the level of output achieved.

Variable costs: wages and electricity, raw material purchases which vary directly according to the level of output achieved.

Total costs = Fixed costs + variable costs

The major difference between full cost pricing and marginal cost pricing is that the marginal gives the flexibility not to recover a portion of the fixed costs depending upon the market situation.

Break-Even Concept

The break-even analysis concept is aimed at a level where the total costs exactly equal to the total revenues, the result is zero profit and zero loss. At a level were the revenues exceed the costs, profits are earned and at the other level, losses are incurred.

Many firms prefer the break-even concept in their methods of pricing. The firm uses the concept for price fixation and also to determine the level of production which is required for achieving the desired profits.


3. Demand Based Pricing

  • Pricing that is determined by how much customers are willing to pay for a product or service.
  • This method results in a high price when demand is strong and a low price when demand is weak.
  • May be differentiated based on considerations such as time of purchase, type of customer or distribution channel.

Below are the methods of pricing that are commonly used under demand based pricing

Skimming Pricing

One of the most commonly used strategies is the skimming strategy. In this strategy, the firm skim the market by selling at a premium price. Skimming method skims the market in the first instance through high price and then settles down for a lower price.

In the introduction stage firm keep a higher price means higher profit. This method is usually favourable for pricing of a new luxury product. It also helps the firm to get the feel of the demand of the product and then make appropriate changes in the pricing strategy.

Penetration Pricing

Penetration Pricing keeps a low price for a new product or service during its initial offering. The objective of penetration price strategy is to gain grip in a highly competitive market. Market share or market penetration are the two most important objective.

The problem with this strategy is that it often heralds a price war within the industry which could, in turn, prove fatal to all the firm’s profit.

Charging What the Traffic Will Bear

It points out demand price. Cost of service and value of service principle are the two principles in pricing. The second term is charging what the traffic can bear.  Professionals like lawyers, doctors, chartered accountants etc., adopt this principle. They charge their fees on the basis of ability to pay and the cost factor comes secondary in their charges.

Read: Marketing Environment – Meaning, Components, Importance


4. Competition-based pricing

Marketers will choose a brand image and desired market share as per competitive reaction. It is necessary for the marketer to know what the rival organisation is charging. Level of competitive pricing enables the firm to price above, below, or at par and such a decision is easier in many cases

Below are the methods of pricing that are commonly used under Competition-based pricing

Discount Pricing

Traders or buyers were offered price concessions in the form of deductions from the list price of from the amount of a bill or invoice. These are forms of indirect price competition.

The common forms of discount pricing are:

  • Trade Discount: It is given to the buyers buying for resale, for example, wholesaler or retailer.

  • Cash Discount: It is a rebate or a concession given to the trader or consumer to encourage him to pay in full by cash or cheque within a short period of the date of the bill or invoice.

  • Quantity Discount: These are given to the customer to encourage to make bulk or large purchases at a time.

  • Quantity Discount: These are given to the customer to encourage to make bulk or large purchases at a time.

  • Seasonal Discount: Additional seasonal discount for example 10%, 15%  are offered to a dealer or a customer.

Premium Pricing

Premium pricing is the practice in which a high-end product is sold at higher than that of competing brands to give it a snob appeal through an aura of exclusivity. It also referred to as skimming, image pricing or prestige pricing.

The firm may decide to charge a high initial price to take advantage of the fact that some buyers are willing to pay a much higher price than others as the product is of high value to them.

The skimming pricing is followed to cover up the product development cost as early as possible before competitors enter the market.

Going Rate Pricing

Going Rate Pricing is also known as Parity Pricing. In this method, the firm bases its price on the average price of the product in the industry or prices charged by competitors. This method assumes that there will be no price war within the industry. It is commonly used in the oligopolistic market.

Read: Consumer Behaviour – Classification, Importance, Stages


Other popular methods of pricing strategies

Perceived Value Pricing Method

In perceived value pricing method, prices are decided on the basis of the customer’s perceived value. They see the buyer’s perceptions of value, not the seller’s cost as the key indicator of pricing.

Value Pricing Method

In value pricing, the marketer charges a fairly low price for a high-quality offering. This method proposes that price represents a high-value offer to consumers.

Sealed Bid Pricing

In sealed bid pricing, the firms submit bids in sealed covers for the price of the job or the service.

Psychological Pricing

In psychological pricing method, the marketer bases prices on the psychology of consumers. Price as an indicator of quality is perceived by many consumers.

While evaluating products, buyers carry a reference price in their mind and evaluate the alternatives on the basis of this reference price. Sellers often exploit these reference points and decide their pricing strategy.

Odd Pricing

In odd pricing method, the buyer charges an odd price to get noticed by the consumer. One such example is of Bata. Bata prices are always an odd number like ` 899.99, etc.

Geographical Pricing

Geographical pricing is a method in which the marketer decides pricing strategy depending on the location of the customer like domestic pricing, international pricing, third world pricing etc.

Discriminatory Pricing

Discriminatory pricing is a method in which the marketer discriminates his pricing on a certain basis like the type of customer, location and so on.


Pricing objectives

  • Survival
  • Profit Maximization
  • Target Return on Investment (ROI)
  • Market Share Goals
  • Status Quo Pricing

Go On, Tell Us What You Think!

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Recommended:

  1. Marketing Mix – 4ps: Definition, Example, Importance
  2. Marketing Environment – Meaning, Components, Importance
  3. Consumer Behaviour – Classification, Importance, Stages
  4. Brand Management – Importance, Definition, Challenges, Functions
  5. What is Strategic Management Process? Models, Steps, Importance
  6. What is an Entrepreneur | Definition, Types, Qualities

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