6.5:
Pricing Methods
Pricing methods are of three types.
First is cost-based pricing, in which prices are determined by adding a profit margin to the production cost.
For instance, a computer produced at 2,000 dollars with a 30% profit margin would sell for 2,600 dollars.
This method ensures profit but overlooks customer value perceptions and competitor pricing.
Second is value-based pricing, where prices are determined by customers' perceived value.
For example, business-class tickets are priced higher due to the added perceived value, such as premium meals and services.
While this method yields high margins, it's less effective in saturated markets.
Lastly, competition-based pricing involves setting prices at, below, or above competitor prices.
For instance, airline brands adjust fares according to their rivals' prices to remain competitive and respond to market conditions.
This method ensures increased revenues and market share but overlooks the price buyers might be willing to pay.
Companies leverage these pricing methods considering their product, market competition, cost structure, and customer value perception to ensure profitability while staying competitive.
6.5 Pricing Methods
The three primary pricing methods that firms use to develop their pricing strategy are:
- Cost-based Pricing: In this method, prices are set by adding a profit margin to the cost of producing or acquiring a product. It ensures that all costs are covered and each sale makes a profit but does not consider the value perceived by customers or the prices set by competitors. It is often used in industries with standardized products.
- Value-based Pricing: Here, the price is set based on the perceived value of the product or service to the customer rather than the cost of production. This method requires a deep understanding of customers' needs, preferences, and willingness to pay. It is often used for unique, innovative, or high-quality products that offer significant value to customers.
- Competition-based Pricing: This method involves setting prices based on competitors' charges. Depending on their market positioning and strategy, firms may price their products lower, higher, or at par with competitors. This method is commonly used in highly competitive markets with similar product offerings.
Effective pricing strategies often involve a mix of these methods.
The choice of pricing method depends on the firm's objectives, market conditions, product characteristics, and customer preferences.