Several pricing methods are available to businesses. Before adopting a pricing strategy, certain internal and external factors need to be considered.
Internal pricing factors include production and other costs, and marketing strategies. External factors include market competition, demand and supply relationships, customer behavior, and legal requirements.
The different pricing methods include: cost-based pricing, value-based pricing, and competition-based pricing. Pricing strategies for new products include penetration pricing and price skimming.
This unit deals with important pricing decision concepts and discusses the different methods of pricing a product.
Although geared towards the goal of maximizing wealth, different businesses adopt different pricing strategies. The main objectives in choosing and setting the price of a product include maximization of profit, meeting targets, and keeping up with competition. Several factors are to be considered in coming up with pricing strategies. Read more..
Cost-based pricing is a pricing method wherein a mark-up is added over costs incurred to come-up with the suggested price of the product. Cost-based pricing ensures that costs are fully recovered and desired profits are met. Read more..
Value-based pricing is a pricing method wherein prices are set based on the buyer's perceived value. Unlike, cost-based pricing that places a certain markup on top of costs incurred, value-based pricing sets prices based on the benefits provided by the product. Read more..
Competition-based pricing is a pricing method that makes use of competitors' prices for the same or similar product as basis in setting a price. This pricing method focuses on information from the market rather than production costs and perceived value. Read more..
Penetration pricing involves setting low prices with the intention of quickly introducing a new product to the market. Price skimming involves setting high initial prices to make huge profits in the early stages of the product's life cycle. Read more..