Definition: The pricing methods enlighten the various techniques and strategies used for deciding a product’s final price. For this purpose, it acknowledges the multiple price determinants including the cost of production, product life cycle, customer requirements, market demand, industry type, competition level, etc.
Efficient product pricing is the key for a business to acquire sustainability and profitability in a competitive market environment.
Content: Pricing Methods
- Different Types of Pricing Methods
- Cost-oriented Pricing Methods
- Market-oriented Pricing Methods
- Other Pricing Methods
Different Types of Pricing Methods
When it comes to product pricing, most of us are aware of only one method i.e., the cost plus profit makes the selling price. But there is much more in the real world of product pricing.
Over the period, several pricing strategies are developed by the experts and business people to facilitate the trading of a huge range of products. We have picked some of the crucial ones out of these for you today:
Cost-oriented Pricing Methods
Being the most commonly used methods, in this pricing strategy the total cost of manufacturing or acquiring a product or service is the key player in its price determination.
Here, both the fixed and variable overheads are taken into consideration while ascertaining an appropriate price of a product.
Given below are the various cost-oriented pricing methods:
Break-even Pricing: This pricing strategy prioritizes the recovery of the sum invested in the project. The idea is to evaluate the break-even price where the cost meets the revenue. Therefore, the manufacturer aims at selling a certain number of units to reach the break-even point.
Mark-up Pricing: In this pricing pattern, the company ascertains a profit margin as a certain percentage over the selling price. The manufacturer first decides the profit percentage it is expecting to realize and being the cost price known, the selling price is finally calculated.
Absorption Pricing: It is a kind of marketing strategy where the seller tries to highlight a product among the consumers by selling it at a price even below the normal or acceptable price range.
Marginal Cost Pricing: While determining the product price under marginal cost pricing method, the seller acknowledges only the variable cost incurred on its production. Thus, the product is priced little more than its marginal cost.
Cost Plus Pricing: It is the most elementary pricing method adopted by manufacturers. Here, the product’s selling price is a summation of the total cost and profit margin set by the company.
Target Return Pricing: Under this strategy, the idea is to make an overall gain on the capital invested in a project. Thus, a certain rate of return on investment is determined and this profit margin is added to the total investment. Later the number of units produced is divided from this total value to acquire the selling price of each unit.
Early Cash Recovery Pricing: While operating in a dynamic market, it becomes essential to recoup the investment as early as possible. Hence, the seller labels the product at a higher price initially when it is new in the market and then gradually decreases the price when the cost is recovered.
Market-oriented or Competition-based Pricing Methods
When we talk of competition prevailing in the market, we often find it more relevant to price a product or service in compliance with the consumer demand and market conditions.
Thus, the market-oriented pricing strategies emphasize more on the factors determining market competition rather than the cost elements.
Let us now throw light upon the different pricing methods under this category:
Penetration Pricing: It is quite obvious that this is strategy is focused on strengthening the roots in the market through a low pricing practice. This method establishes low price as seller’s USP and therefore considered as an effective strategy in a highly competitive market. For instance; Disney plus Hotstar.
Market Pricing: This is a pure form of market-oriented pricing since the product prices are controlled by its market demand and supply in this case.
Customer-driven Pricing: As the name suggests, this pricing strategy centralizes the customers for price determination. The product is therefore priced at the highest value which the prospective consumer is willing to pay for it. For instance; designer clothes.
Skim Pricing: This product pricing ideology functions on the concept that the consumers can pay generously for an innovative product. Hence, the seller introduces the product at a high price, although as time passes, the price is dropped gradually. For instance; Apple i-phones.
Differential Pricing: It is commonly seen in cases where the customer receives an additional discount on bulk purchase. Under this strategy, a seller offers the same product to different customers at varying prices due to diverse conditions, locations, segments or circumstances. For instance; Movie tickets.
Going Rate Pricing: In this pricing method, the product price is ascertained by the key players or big fishes of the market. However, the rest of the firms just need to follow these standards ignoring the cost or demand factors. For instance; Telecom services.
Negotiable Pricing: When it comes to industrial buyers, the firms resort to the negotiable pricing strategy. Here, the prices are ascertained on the basis of customer requirements as well as the cost incurred by the seller. For instance; cloth mills purchasing cotton from villagers.
Discount Pricing: This is quite a competitive pricing strategy where the product is offered at an inferior price than that set by the competitors. It increases the customer footfall at the seller’s place, in a competitive market. For instance; flash sales on online stores.
Sealed Bid or Tender Pricing: In a sealed bid pricing, the seller quotes a unique price of its product which is often set at a low-profit margin in a secret bid. Although the market players are unaware of the price quoted by one another. The tender can be of a bulk production or purchase by the government or an industrial buyer. For instance; canteen tender in a government college.
Destructive Pricing: It is considered to be a negative approach. Since it aims at eliminating the competitors from the market by offering the product at an extremely low price (temporarily), to attract the majority of customers. For instance; Reliance Jio Infocom Ltd.
Premium Pricing: Such a pricing cum marketing strategy is to grab the attention of premium customers. It focuses on pricing the products exceptionally high to portray the image of superior quality and serve the buyer’s intention of establishing a class. For instance; Sabyasachi Bridal Wear.
Parity Pricing: This pricing method simply functions on the principle that with the rise in the cost of raw material or other inputs, the product prices goes up proportionately. For instance; petrol and diesel.
Other Pricing Methods
Other than those stated above, some additional pricing strategies are also identified. These are as follows:
Single Pricing: The idea behind single pricing is to ensure uniformity among the consumers of different geographical locations, class, etc. Here, every consumer has to pay the same price for a product or service. For instance; train tickets.
Psychological Pricing: Most of the mega marts and shopping malls use this pricing strategy to increase their sales. In a psychological pricing method, the seller marks the price little less than the whole figure to create an illusion of a low priced deal in the minds of the consumers. For instance; a pair of sunglasses priced at ₹99 instead of ₹100; also 99 Cents Only Stores in America.
Limit Pricing: Under this unique practice, a monopolist price the products such that the profit margin is very low. This strategy makes the business opportunity unappealing to the new entrants and they hesitate to invest in the idea, thus ensuring business monopoly for a long-term. For instance; Microsoft.
Affordability Pricing: When it comes to essential goods, the product prices are set at the lowest possible value to make it economical for the people of different sections of society. Sometimes, the government subsidies curtail the product price even lower than its cost of production. For instance; grains and pulses.
Captive Pricing: In a captive pricing method, a product is bifurcated into the core product and captive product. The company attracts the customers with an inexpensive core product, however, makes profit by selling the captive product (i.e., additional features and essential components) at a higher price. For instance; computer system is a core product, however, its configurations and software are captive products.
Peak Load Pricing: Here, the product prices are usually inflated when the demand is at its maximum and deflated when the demand falls. Thus, at high demand period, the companies can make the maximum profit, while during the downfall period, the ideology is to recover the cost. For instance; airline ticket fares.
Bundle Pricing: People are mostly allured by the combos and bundled products since these products are available at a fairly low price than what they would cost the consumers individually. This smart pricing strategy where two or more complementary products are sold at one stretch is termed as bundle pricing. For instance; Himalaya baby gift basket.
Internet Pricing Models: In today’s networking era, internet services are considered to be hot-selling products. The pricing strategies of these services vary from company to company:
- Transaction-Based Pricing: The product price is driven by the number of transactions required to process an order by the service provider.
- Flat-Rate Pricing: Common in the service industry, it is a model where the price of offering a service remains constant throughout.
- Smart Market Mechanism Model: Under this internet pricing strategy, multiple bidders participate and the one with the highest unit price or the bit, cracks the deal. Being a model functioning on network congestion, the bit price responds to the network traffic.
- Priority Pricing: Again a customer-controlled pricing function, where the internet prices upraise with the demand for the superior quality of internet services.
- Precedence Model: Data security is the key influencer in such a pricing model. Formation of data packets each with a unique precedence number takes place as per the customer’s network preference, which is released in the allocated sequence at the time of network congestion.
- Usage-Sensitive Pricing: This is one of the most convenient pricing method where the service provider imposes connection charges initially and then collects the usage tariff i.e., bit or price per unit.
What if a renowned painter starts selling his masterpiece at a nominal price? He would surely lose his worth and goodwill.
Similarly, if a mineral water company starts selling its product at a premium price, no one would even think of buying such a product.
Therefore, the right pricing strategy is essential for rolling the business in the right direction.