Pricing Strategy Essay

481 words - 2 pages

PRICING METHODS

1. MARKUP PRICING: - This method is to add a standard markup to the product’s cost. Construction companies submit job bids by estimating the total project cost and adding a standard markup for profit. Lawyers and accountants typically price by adding a standard markup on their time and cost.
Unit cost = Variable cost + Fixed Cost
Unit sales

Markup price = Unit cost
1 – Desired return on sales

2. TARGET- RETURNS PRICING: - In target return pricing, the firm determines the price that would yield its target rate of Return On Investment (ROI). General Motors has priced its automobiles to achieve a 15% to 20% ROI.
Target – returns price = Unit Cost + Desired return * Invested Capital
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The key to perceived value pricing is to deliver more value than the competitors and to demonstrate this to prospective buyers. The company can try its offerings in several ways: managerial judgments within the company, value of similar products, focus groups, surveys, etc.

4. VALUE PRICING: - It sets prices primarily not exclusively on the value perceived or estimated, to the customer rather than on the cost of the product or historical prices. Either goods are very intensely traded (e.g. oil ) or sold to highly sophisticated customers in large markets (e.g. automotive industry). Here usually goods are sold based on cost-based-pricing. Value-based-pricing is most successful when products are sold based on emotions (fashion), in niche markets, in shortages (e.g. drinks at open air festival at a hot summer day) or for indispensible add-ons (e.g. printer cartridges, headsets for cell phones).Among the best practitioner of value pricing are IKEA, Target, and Southwest Airlines.

5. GOING- RATE PRICING: - Here the firm bases its price largely on competitors’ prices, charging the same, more, or less than major competitors. In oligopolistic industries that sells a commodity such as steel, paper, or fertilizers, all firms normally charge the same price. In a competitive market, firms fix a price which is equal to the average price charged by all firms in an industry, i.e., it collects all the prices firms with same product and computes the average.

6. AUCTION TYPE PRICING: - Auction type pricing is growing more popular, especially with the growth of the internet. “Breakthrough Marketing: EBay” describes the ascent of that wildly successful Internet company. There are over 2000 electronic marketplaces selling everything. One major purpose of auction is to dispose of excess inventories or used goods.

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