A

Session 21

Methods of
Pricing
Categories of Pricing Methods:
1. Cost-based pricing
2. Demand-based pricing
3. Competition-oriented pricing
4. Value pricing
5. Product Line-oriented pricing
6. Tender pricing
7. Affordability-based pricing
8. Differentiated pricing
1. Cost-based pricing:
► Mark-up pricing (Cost plus pricing)
► Absorption cost pricing (Full cost pricing)
► Marginal cost pricing
► Target rate of return pricings
Mark-up Pricing:
Sale price = Cost price + Margin

Absorption Cost Pricing:

Variable Cost + Fixed Cost in manufacturing, selling and
administration = total cost
Selling Price = Total cost + Margin

Marginal cost pricing:

Marginal cost pricing aims at maximizing the contribution towards
fixed cost. Marginal costs includes all the direct variable costs of
the product.
2. Demand/Market Based Pricing:
►What the traffic can bear pricing

►Skimming Pricing

►Penetration Pricing
What the traffic can bear pricing:
►Sellers takes the maximum price that the customers are willing
to pay for the product under the given circumstances.
Skimming Price:
►First Instance through high price and subsequently settles down
for a lower price.
►It aims at high price in the early stage of marketing the product.
Penetration Price:
►To achieve greater market penetration through relatively low
price.
►This method is useful in pricing of new products under certain
circumstances.
3. Competition-Oriented Pricing:

►Premium Pricing:
Pricing above the level adopted by competitors.

►Discount Pricing:
Pricing below the level adopted by competitors.

►Parity pricing/ Going Rate pricing:

Matching competitors pricing.
Example: follow the leader
4. Value Based Pricing:
Value pricing is not matter of simply getting lower prices, its is a
matter of reengineering the company’s operations to become a
low-cost producer without sacrificing quality, and lowering
prices significantly to attract a large no. of value-conscious
customers.
Pricing methods based on cost, demand and competition.

Value>Price>Costs
Price>Value>Costs
Price>Costs>Value
Price=Costs>Costs

Example: Everyday low pricing (EDLP)

High-Low pricing (HLP)
6. Tender Pricing:
Ascending bids: One seller and many buyers.
Example : Placing used products in yahoo, e-bay. The seller puts
an item and bidders raise the offer price until the top price is
reached.

Descending bids: One buyer and many sellers.

Example: Buyer announces some thing that he wants to buy and
then potential sellers compete to get the sale by offering the lower
price.

Sealed bid auctions: Would be suppliers can submit only one bid
and cannot know the other bids.
5. Product-Line based Pricing:
Prices of the different product in such a manner that the product in
as a whole is priced optimally, resulting in optimal sales of all the
products put together and optimum total profits from the line.
7. Affordability Pricing:
Essential commodities, which meet the basic needs of all sections of
people.
 Promotional Pricing

Loss-leader pricing:
Example : Supermarkets and department stores often drop the price
on well known brands to stimulate additional store traffic.

Special event pricing:

August, back-to-school sales

Cash Rebates:
Low Interest financing:

Longer payment terms:

Warranties and service contracts:

Extended free warranties

Psychological discounts:
Was 359 now 299
8. Differentiated Pricing:
Companies often adjust their basic price to accommodate
differences in customers, products, locations and so on.

Price Discrimination: When a company sells a product or service

at two or more prices that do not reflect a proportional differences
in costs.

Customer-segment pricing:
Example : Railway charge lower charges for children and senior
citizens.
Product-form pricing:
Different versions of the product are priced differently but not
proportionately to their respective cost.
Image Pricing:
Perfume in different bottles will be charged different.
Channel pricing;
Coca-cola in restaurants, vending machines, hotels
Location Pricing:
Theatres in different locations with same serving purpose.
Time Pricing:
Hotels charges less on weekends.
 PRICING METHODS

MARKET ORIENTED PRICING:

COST ORIENTED PRICING:
 Pricing new product
 Full-Cost (Skimming or penetration)
 Direct-Cost  Pricing existing product
 Target return (Build objective, Hold objective,
Harvest, Repositioning strategy)

PRICING METHODS

VALUE TO THE CUSTOMER:

COMPETITOR ORIENTED PRICING:
 Going Rate
 Competitive Bidding
 Buy response method
 Trade-Off analysis
 Experimentation
 EVC