The Pricing methods are the ways in which the price of goods and services can be calculated by considering all factors, such as production and distribution costs, competition, target audience, positioning strategies, etc., that influence the establishment of prices.
There are several methods for setting the price of the product. Some are cost-oriented, while others are market-oriented. Each of these methods has its positive and negative points, as well as its applicability..
An organization has several options for selecting a pricing method. Prices are based on three dimensions: cost, demand and competition.
Although customers do not buy products that are priced too high, the business will not be successful if the prices of the products are too low to cover all business costs..
Along with product, venue, and promotion, price can have a profound effect on the success of a small business..
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It refers to a pricing method where a certain desired percentage of profit margin is added to the cost of the product to obtain the final price. Cost-based pricing can be of two types:
It is the simplest method to determine the price of a product. In the cost plus pricing method, to establish the price a fixed percentage of that total cost is added to the total cost, also called the surcharge percentage, which will be the profit.
For example, organization XYZ generates the total cost of $ 100 per unit to produce a product. Add $ 50 per unit to the price of the product as profit. In such a case, the final price of a product of the organization would be $ 150.
Cost plus pricing is also known as average cost pricing. This is the most used method in manufacturing organizations..
In economics, the general formula for setting the price in the case of cost-plus pricing is as follows:
P = CVP + CVP (r), where:
CVP = Average Variable Cost.
r = percentage of surcharge.
CVP (r) = gross profit margin.
To determine the average variable cost, the first step is to estimate the production volume for a given period of time, taking into account the planned production or the normal level of production..
The second step is to calculate the Total Variable Cost (CVT) of what is produced. The CVT includes all direct costs, such as costs for materials, labor and electricity..
Once the CVT is calculated, the CVP is obtained by dividing the CVT by the quantity produced (C): CVP = CVT / C.
Then the price is set by adding some percentage of the CVP as a profit margin: P = CVP + CVP (r).
Refers to a pricing method where a fixed amount or a percentage of the cost of the product is added to the price of the product to obtain the selling price.
Premium pricing is more common in retail, where a retailer sells the product for a profit.
For example, if a retailer has taken a product from the wholesaler for $ 100, then they could add a $ 20 markup to make a profit. It is expressed mainly by the following formulas:
Surcharge as a percentage of cost = (Surcharge / Cost) * 100.
Surcharge as a percentage of sale price = (Surcharge / Sale price) * 100
For example, a product sells for $ 500, which cost $ 400. The surcharge as a percentage of the cost is equal to (100/400) * 100 = 25%. The markup as a percentage of the sale price is equal to (100/500) * 100 = 20%.
They refer to a pricing method where the price of a product is set according to its demand.
If the demand for a product is higher, an organization will prefer to set high prices for the products to make a profit. On the other hand, if the demand for a product is lower, low prices will be charged to attract customers.
The success of demand-based pricing depends on the ability of marketers to analyze demand. This type of pricing can be seen in the travel and tourism industries..
For example, airlines during the low demand period charge less fees compared to the high demand period.
Demand-based pricing helps the organization make more profit if customers accept the product at its price rather than its cost.
They refer to a method in which an organization considers the prices of competing products to establish the prices of its own products..
The organization may charge higher, lower or equal prices compared to the prices of its competitors.
The aviation industry is the best example of competition-based pricing, where airlines charge the same or lower price for the same routes that their competitors charge..
In addition, the introductory prices charged by publishing organizations for textbooks are determined according to the prices of competitors..
In addition to the established pricing methods, there are other methods that are described below:
It involves a method in which an organization tries to win loyal customers by charging low prices for its high-quality products..
The organization seeks to become a low-cost producer without sacrificing quality. You can offer high-quality products at low prices by improving your research and development process.
It helps to achieve the required rate of return on the investment made for a product. In other words, the price of a product is fixed on the basis of the expected profit.
It involves a method in which an organization sets the price of a product in accordance with prevailing price trends in the market.
Therefore, the pricing strategy adopted by the organization may be the same or similar to that of other organizations..
However, at this type of price, the prices set by the market leaders are followed by all industry organizations..
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