What are the various methods of pricing of product? Which do you recommend and why?
What are the various methods of pricing of product? Which do you recommend and why?
Ans.
Methods of Pricing
There are several methods of pricing. Some commonly used pricing methods are discussed in detail below:
1. Cost-based Pricing: Under the cost-based category following methods are commonly used.
(i) Cost plus Method: Under this method the price of a product is arrived by adding the required margin towards profit to the unit total cost. Total cost here means cost of three operations manufacturing, selling and administrating.
(ii) Make up Method: In this pricing method the selling price of the product is fixed by adding a margin to its cost price. This method is based on the assumption that value of the product (unit cost of the product) is known and a reasonable mark up can be added to the cost. The objective of such pricing is to maximise the profits in the short run and medium run without sacrificing the sale.
(iii) Target Return Method: This pricing method is in some way similar to cost plus method but the only difference is that in cost plus method the required margin towards profit which is added to unit total cost is usually decided arbitrarily. In the target return method the approach is rational and a targeted return on the invested capital is fixed. This method is mostly applied on sale of products on a reasonable selling price to common people.
(iv) Marginal Cost Pricing Method: Marginal costs include all the variable costs of the product and in this method these variable costs are fully realised and a portion of the fixed costs is also realised. This method gives the flexibility not to recover a portion of the fixed costs or to recover a large share of the fixed costs depending on the market situation.
2. Demand/Marketing based Pricing: The following methods belong to this category.
(i) Market Penetration Method: This method aims at greater market penetration through relatively low prices. In this method the prices are kept low and reasonable to create demand of the product in market and to face competition. This method is applied when product is capable in bringing large sales volume.
(ii) Perceived Value Pricing Method: In this method the pricing is done on the basis of utility experienced by the buyer in a given product. The producer tries to infuse greater amount of a utility in the product so that the desired price could be realised. For example the prices of herbal cosmetics are kept high because of their utility recognition by the consumer.
(iii) Skimming Pricing: In this process the new product is priced high and the cream of the market is skimmed by concentrating those segments that are not price sensitive.
(iv) Introductory Price Method: While introducing a new product in the market the firms offer discounts to customers to attract them and to increase the demand. This introductory offer is withdrawn when the product has found place in the market.
3. Competition Oriented Pricing: It does not necessarily mean matching competition in price. Various methods. are adopted under this category like premium pricing, discount pricing and parity pricing and for all of them competitor’s price serves as the reference point. Premium pricing means to charge a little higher price than that of competitor, discount pricing means to keep the price below the prices of a substitute offered by competition and parity pricing means matching competitors pricing.
On examining all the pricing methods it is difficult to infer which method is the best as all the methods have their own merits and demerits. As a buyer we will prefer perceived value pricing method as it is based on the utility experienced by the buyer in the given product. The manufacturer tries to deliver the value promised by their value proposition and the customer must perceive this value.
