PRICING METHODS: TYPES AND THEIR CHARACTERISTICS - DUDAS - 2025

The methods of pricing are the ways in which you can calculate the price of goods and services considering all factors, including costs of production and distribution, competition, target audience, positioning strategies, etc., influencing pricing.

There are several methods of pricing the product. Some are cost-oriented, while others are market-oriented. Each of these methods has its positive and negative points, as well as its applicability.

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An organization has several options for selecting a pricing method. Prices are based on three dimensions: cost, demand, and competition.

Although customers do not purchase products that are priced too high, the business will not be successful if the prices of the products are too low to cover all business costs.

Along with product, venue, and promotion, price can have a profound effect on the success of a small business.

List of types and their characteristics

-Prices based on cost

It refers to a pricing method where a certain desired percentage of profit margin is added to the cost of the product to obtain the final price. Cost-based pricing can be of two types:

Cost plus prices

It is the simplest method to determine the price of a product. In the cost plus pricing method, to establish the price a fixed percentage of that total cost is added to the total cost, also called the surcharge percentage, which will be the profit.

For example, organization XYZ generates the total cost of $ 100 per unit to produce a product. Add $ 50 per unit to the price of the product as profit. In such a case, the final price of an organization product would be $ 150.

Cost plus pricing is also known as average cost pricing. This is the most widely used method in manufacturing organizations.

In economics, the general formula for setting the price in the case of plus-cost pricing is as follows:

P = CVP + CVP (r), where:

CVP = Average Variable Cost.

r = percentage of surcharge.

CVP (r) = gross profit margin.

To determine the average variable cost, the first step is to estimate the production volume for a given period of time, taking into account the planned production or the normal level of production.

The second step is to calculate the Total Variable Cost (CVT) of what is produced. The CVT includes all direct costs, such as costs for materials, labor, and electricity.

Once the CVT is calculated, the CVP is obtained by dividing the CVT by the quantity produced (C): CVP = CVT / C.

The price is then set by adding some percentage of the CVP as a profit margin: P = CVP + CVP (r).

Price per surcharge

Refers to a pricing method where a fixed amount or a percentage of the cost of the product is added to the price of the product to obtain the selling price.

Premium pricing is more common in retail, where a retailer sells the product for a profit.

For example, if a retailer has taken a product from the wholesaler for $ 100, then they could add a $ 20 markup to make a profit. It is expressed mainly by the following formulas:

Surcharge as a percentage of cost = (Surcharge / Cost) * 100.

Surcharge as a percentage of sales price = (Surcharge / Sales price) * 100

For example, a product sells for $ 500, which cost $ 400. The markup as a percentage of the cost is equal to (100/400) * 100 = 25%. The markup as a percentage of the sale price is equal to (100/500) * 100 = 20%.

-Prices based on demand

They refer to a pricing method where the price of a product is set according to its demand.

If the demand for a product is higher, an organization will prefer to set high prices for the products to make a profit. On the other hand, if the demand for a product is lower, low prices will be charged to attract customers.

The success of demand-based pricing depends on the ability of marketers to analyze demand. This type of pricing can be seen in the travel and tourism industries.

For example, airlines during the low demand period charge less fares compared to the high demand period.

Demand-based pricing helps the organization make more profit if customers accept the product at its price rather than its cost.

-Prices based on competition

They refer to a method in which an organization considers the prices of competing products to establish the prices of its own products.

The organization may charge higher, lower, or equal prices compared to the prices of its competitors.

The aviation industry is the best example of competition-based pricing, where airlines charge the same or lower price for the same routes that their competitors charge.

In addition, the introductory prices charged by publishing organizations for textbooks are determined according to the prices of competitors.

-Other pricing methods

In addition to the established pricing methods, there are other methods that are described below:

Value price

It involves a method in which an organization tries to win loyal customers by charging low prices for its high-quality products.

The organization seeks to become a low-cost producer without sacrificing quality. You can offer high-quality products at low prices by improving your research and development process.

Target return price

Helps to achieve the required rate of return on the investment made for a product. In other words, the price of a product is set based on the expected profit.

Current rate price

It involves a method in which an organization sets the price of a product according to prevailing price trends in the market.

Therefore, the pricing strategy adopted by the organization may be the same or similar to that of other organizations.

However, at this type of pricing, the prices set by the market leaders are followed by all industry organizations.

References

1. Nitisha (2019). 4 Types of Pricing Methods - Explained! Economics Discussion. Taken from: economicsdiscussion.net.
2. Smriti Chand (2019). Methods of Pricing: Cost-Oriented Method and Market-Oriented Method. Your Article Library. Taken from: yourarticlelibrary.com.
3. Business Jargons (2019). Pricing Methods. Taken from: businessjargons.com.
4. Josh Kaufman (2019). What Are The '4 Pricing Methods'? The Personal MBA. Taken from: personalmba.com.
5. Lumen (2019). Pricing Methods. Taken from: courses.lumenlearning.com.