What is Cost-Based Pricing?

Cost-based pricing can be defined as a pricing method in which a certain percentage of the total cost is
added to the cost of the product to determine its selling price. In other words, it refers to a pricing
method in which the selling price is determined by adding a profit percentage to the cost of making the
product.

Explanation

It is the approach to pricing which involves the costs for producing, distributing, and selling the product
by adding a fair rate of return to compensate for the efforts and risks taken by the company. It is a
simple way to calculate the product’s price by calculating the total cost in which the desired profit is
added to determine the final selling price.

#1 – Cost-Plus Pricing

It is the simplest method of determining the price of the product. In cost-plus pricing method, an affixed
percentage, also called markup percentage, of the total cost (as a profit) is added to the total cost to set
the price. Say, for example, an ABC organization bears the total cost of $100 per unit for producing a
product. Therefore, it adds $50 per unit to the product as’ profit. In such a case, the final price of the
organization’s product would be $150. This pricing method is also called average cost pricing and is
commonly used in manufacturing organizations.

The formula to calculate the cost-based pricing in different types is as follows:

Price = Unit Cost + Expected Percentage of Return on Cost

#2 – Markup Pricing

It refers to a pricing method in which the fixed amount or percentage of the cost of the product is added
to the product’s price to get the selling price of the product. Markup pricing is more common in
retailing, in which a retailer sells the product to earn a profit. For example, if a retailer has taken a
product from the wholesaler for $100, he might add up a markup of $50 to profit.

Price = Unit Cost + Markup Price

Where,

Markup Price = Unit Cost / (1-Desired Return on Sales)

#3 – Break-Even Cost Pricing

In the case of Break-even Pricing, the company aims to maximize contribution towards the fixed cost.
This is relevant, particularly in the industries that involve high fixed costs like the transport industry. The
sales level required to cover relevant variables and fixed costs will be determined here.

Price = Variable cost + Fixed Costs / Unit Sales + Desired Profit

#4 – Target Profit Pricing

In target profit pricing, prices target the specific level of profits or return it wants to earn on an
investment.

Price = (Total Cost + Desired Percentage of Return of Investment) / Total Units Sold

Examples of Cost-Based Pricing

A company sells goods in the market. It sets the price based on cost-based pricing. The variable cost per
unit is $200, and the fixed cost per unit is $50. Profit markup is 50% on cost. Calculate the Selling price
per unit.

Here, the selling price will be calculated based on cost-plus pricing.

What is product life cycle pricing?

Product life cycle pricing is a strategy for selling products in which pricing correlates with a product’s
location in its life cycle. There are four phases within the life cycle, including launch, growth, maturity
and declination. Businesses use product life cycle pricing to better understand how discounts, clearance
prices, new versions and marketing can affect their sales in each phase. A company may choose to
strategize differently depending on the market and how its product sells.

Perceived value pricing

Definition: Perceived value pricing is that value which customers are willing to pay for a particular
product or service based on their perception about the product. Perceived value pricing is not based on
the cost of the product, but it is the value which the customer thinks that he/she is deriving from
consuming a product or a service.

3. Price Skimming.

Price skimming sees a company charge a higher price because it has a substantial competitive
Advantage. However, the advantage tends not to be sustainable. The high price attracts new
Competitors into the market, and the price inevitably falls due to increased supply.Manufacturers Of
digital watches used a skimming approach in the 1970s. Once other manufacturers were Tempted into
the market and the watches were produced at a lower unit cost, other marketing Strategies and pricing
approaches are implemented. New products were developed and the Market for watches gained a
reputation for innovation.The diagram depicts four key pricing Strategies namely premium pricing,
penetration pricing, economy pricing, and price skimming Which are the four main pricing
policies/strategies. They form the bases for the exercise. However there are other important approaches
to pricing, and we cover them throughout the Entirety of this lesson.
What Is a Loss Leader Strategy?

A loss leader strategy involves selling a product or service at a price that is not profitable but is sold to
attract new customers or to sell additional products and services to those customers. Loss leading is a
common practice when a business first enters a market. A loss leader introduces new customers to a
service or product in the hopes of building a customer base and securing future recurring revenue.

What Is Competitive Pricing?

Competitive pricing is the process of selecting strategic price points to best take advantage of a product
or service based market relative to competition. This pricing method is used more often by businesses
selling similar products since services can vary from business to business, while the attributes of a
product remain similar. This type of pricing strategy is generally used once a price for a product or
service has reached a level of equilibrium, which occurs when a product has been on the market for a
long time and there are many substitutes for the product.

1. Penetration Pricing.
The price charged for products and services is set artificially low in order to gain market share.
Once this is achieved, the price is increased. This approach was used by France Telecom and Sky
TV. These companies need to land grab large numbers of consumers to make it worth their
While, so they offer free telephones or satellite dishes at discounted rates in order to get people
to Sign up for their services. Once there is a large number of subscribers prices gradually creep
up. Taking Sky TV for example, or any cable or satellite company, when there is a premium
movie Or sporting event prices are at their highest – so they move from a penetration approach
to more Of a skimming/premium pricing approach.

Going rate pricing

Going rate pricing is when a business sets the price of its product or service based on the market price.
This pricing strategy is often used to price similar products, like commodities or generic items, that have
little variation in design and function.

A going rate pricing strategy is most often used to price products or services that are homogenous and
don’t vary in design. Businesses that choose a going rate pricing strategy often set their prices based on
the leader of the market.

Since competitor prices tend to be similar, it’s challenging to differentiate your product or service from
the competition. Businesses that excel with this pricing strategy benefit from a strong branding and
marketing strategy. Creating a positive brand perception and communicating the value it provides can
help your business stand out from the crowd.
What is loss leader pricing?

Loss leader pricing is a marketing strategy that prices products lower than the cost to produce them in
order to attract new customers or to sell additional products to customers. Companies typically use loss
leader pricing when they are entering new markets or attempting to increase market share.

With any loss leader product, retailers hope that, once inside the store, buyers will also purchase other
items that are being offered at full retail price. The profits from those additional purchases generally
more than compensate for the losses on the one.

While loss leader pricing is most often used in retail settings, it can also be effective for an online store
or ecommerce business. Here are some ideas for using a loss leader pricing strategy in your business.

Cyclical Pricing:

Cyclical pricing refers to the pricing decisions of the firm which are taken to suit the fluctuations in the
business conditions. To simplify decision making in response to the alterations in the entire economic
system, it is necessary for the firm to have some kind of policy based on cyclical price behaviour. It is
more apparent to say that prices are slashed during recession and pegged up during a demand-pull or a
demand-push.

In formulating a policy of cyclical pricing, various factors such as demand, competition, cost- push, price
rigidity, price fluctuations, fluctuations due to substitutes, purchasing power, market share and demand
fluctuation should be taken into account.

What is flexible pricing?

Flexible pricing is one of many pricing strategies that could be applied to setting up prices for goods and
services. In the case of flexible pricing, a final price is negotiable, meaning that sellers and consumers
can discuss prices, to either lower them or push them up from the original price. Yet, in most cases, it
serves the management to simulate demand and bump prices up to increase profit or drop the prices to
increase sales. 

This pricing strategy allows retailers to set different prices for the same product depending on the
customer. Whether it is an agreement established through negotiation or a personal assessment of the
seller, prices can fluctuate. Also, the prices of a product may differ in different geographical locations.
Rigid prices imply that there will be no frequent changes in the price of the commodity even when there
is a change in cost or demand. Following oligopoly behaviour leads to such outcomes:

(i) Firms fear the reactions of the rival firms towards change in price
(ii) Cost of informing the customers, advertisement/price lists etc. Discourages the firms to
change the price
(iii) Small changes in demand and cost sometimes may not induce the firms to change the price
because sufficient profit margin may already be included in it

What Is Peak Pricing?

Peak pricing is a form of congestion pricing where customers pay an additional fee during
periods of high demand. Peak pricing is most frequently implemented by utility companies,
which charge higher rates during times of the year when demand is the highest. The
purpose of peak pricing is to regulate demand so that it stays within a manageable level of
what can be supplied.

Peak pricing is also used among ride-sharing services and other transportation providers,
where it is known as “surge pricing.”

KEY TAKEAWAYS

Peak pricing is a method of raising prices during periods of high demand, commonly used by
transportation providers, hospitality companies, and utility providers.Algorithms will often
be used to estimate or predict peak vs. Off-peak times and rates.Users of ride-sharing
services, such as Uber and Lyft, are also familiar with peak or “surge” pricing, which raises
fares during periods of high demand for rides and lower supply of drivers.During heat
waves, the mismanagement of peak pricing and the supply and demand of electricity may
cause blackouts or brownouts.

What is the sealed bid pricing method?

FinanceFinance ManagementBanking & Finance

It is a competitive pricing method, in which prices are decided based on

quotation/estimated price or in sealed bids. This method is generally used in
construction/contract business.

In this, a tender notice is printed in the newspaper. Work proposals, type of job, quality,
duration of project etc. Are printed in the newspaper. In reply to the notice, interested
parties send their sealed bid stating their price, particulars before deadline.
On the due date, submitted sealed bids are opened and allocated to bid at a lower price
with satisfaction conditions. Company sets the price based on how competitors’ costs the
product.

What is Retail Pricing?

The retail price is what consumers pay for the finished product when it is sold. These
customers don’t purchase the item to resell it but to use it. The fundamental objective for a
retailer when setting a price is to maximize the profit while setting a price that customers
will be ready to pay.

Retail price, manufacturer price, and distributor price are all different prices in the retail
supply chain. The final retailer will have the choice to set their pricing based on supply and
demand. A manufacturer can also propose a retail price to match the cost of the product
with its overall production strategy.

What Is an Administered Price?

An administered price is the price of a good or service as dictated by a government or

centralized authority, as opposed to buyers and sellers interacting according to supply and
demand.

KEY TAKEAWAYS

An administered price is one that is decreed by some authority for a good or service, rather
than through a process of price discovery in a free market.Centrally planned governments
tend to rely on administered pricing as they reject capitalism and free markets.Even in
mostly capitalist market economies, some prices are set administratively such as in the case
of rent controls, certain wages, or price ceilings on food items and basic goods.

Multiple Pricing

Multiple pricing, or multiple unit pricing, is a pricing scheme that specifies the item price for
multiple units. A typical example of multiple pricing is an item that sells at 4 for $1.00. In this
example $1.00 is the multiple unit price and 4 is the multiple unit quantity. The method for
assigning item price is called a multiple pricing algorithm.

If the multiple unit price is divisible by a multiple unit quantity without a remainder, then
the item’s unit price is the multiple unit price divided by the multiple unit quantity. In the
previous example, the item’s unit price is $.25 ($1.00 divided by 4). In cases where the
division of the multiple unit price by the multiple unit quantity results in a remainder (as in
the case of 3 for $1.00, where the item price is $.333333.....), then the item price is assigned
in such a way that the total item price for multiple unit quantity items is exactly the multiple
unit price.

Various multiple pricing algorithms are used in the retail industry. SAP Enterprise POS
supports base +1, group threshold, and highest price. You define the multiple pricing
algorithm to be used for an item in the <Price> element of the input file for the item (see
the example below). Keep in mind that an item can have many different prices associated
with it, including future and level prices. And any of these prices can be configured for
multiple pricing.

What are export Pricing?

Price fixed for the export products or services which the exporter intends to sell in the
overseas market is called export pricing. Export price of a given product is determined by
many factors. There are a number of methods used for the purpose of costing in exports.
These methods are divided into three groups.

Objectives of Pricing Policy

Five main objectives of pricing are: (i) Achieving a Target Return on Investments (ii) Price
Stability (iii)

Achieving Market Share (iv) Prevention of Competition and (v) Increased Profits!

Before determining the price of the product, targets of pricing should be clearly stated.

Objectives of a properly planned pricing policy should be logically related to overall

managerial goals.

(i) Achieving a Target Return on Investments:

This is the most important objective which every concern wants to achieve. The objective is
to achieve a

Certain rate of return on investments and frame the pricing policy in order to achieve that
rate. For

Example, the concern may have a set target of 20% return on investment and 10% return on
investments

After taxes. The targets may be a short term (usually for a year) or a long term. It is
advisable to have a
Long term target.

Sometimes, it is observed that the actual profit rates may be more than the target return.
This is because

The targets already fixed are low and new opportunities and demand of the product
exceeding the return

Rate already fixed.

(ii) Price Stability:

This is another important objective of an enterprise. Stability of prices over a period reflects
the efficiency

Of a concern. But in practice, on account of changing costs from time to time, price stability
cannot be

Achieved. In the market where there are few sellers, every seller wants to maintain stability
in prices. Price

Is set by one producer and others follow him. He acts as a leader in price fixation.

(iii) Achieving Market Share:

Market share refers to the share of the company in the total sales of the product in the
market. Some of

The concerns when introduce their product in the competitive market want to achieve a
certain share in

The market in the initial stages. In the long run the concern may aim at achieving a sizeable
portion of the

Market by selling its products at lower prices.

The main objective of achieving larger share in the market is to enjoy more reputation and
goodwill

Among the people. The other consideration of widening the markets by lowering prices is to
eliminate

Competitors from the market.

It has been observed that companies may not like to increase the size of their share on
account of fear of

Govt, intervention and control. General Motors, America, capturing about 50% of the
automobile market,

Passed through this situation. Some companies like General Electric and Johns-Mauville
preferred to

Have relatively small market say 20% rather than 50%.

(iv) Prevention of Competition:

Modern industrial set up is confronted with cut throat competition. Pricing can be used as
one of the

Effective means to fight against the competition and business rivalries. Lesser prices are
charged by some

Firms to keep their competitors out of the market. But a firm cannot afford to charge fewer
prices over a

Long period of time.

(v) Increased Profits:

Maximisation of profits is one of the main objectives of a business enterprise. A firm can
adopt such a

Price policy which ensures larger profits. However, such enterprises are also expected to
discharge certain

Social obligations also

What Is Price Elasticity of Demand?

Price elasticity of demand is a measurement of the change in the consumption of a product

in relation to a change in its price. Expressed mathematically, it is:

Price Elasticity of Demand = Percentage Change in Quantity Demanded ÷ Percentage Change

in Price

Economists use price elasticity to understand how supply and demand for a product change
when its price changes.1 Like demand, supply also has an elasticity, known as price elasticity
of supply. Price elasticity of supply refers to the relationship between change in supply and
change in price. It’s calculated by dividing the percentage change in quantity supplied by the
percentage change in price. Together, the two elasticities combine to determine what goods
are produced at what prices.

KEY TAKEAWAYS

Price elasticity of demand is a measurement of the change in consumption of a product in

relation to a change in its price.A good is perfectly elastic if the price elasticity is infinite (if
demand changes substantially even with minimal price change).If price elasticity is greater
than 1, the good is elastic; if less than 1, it is inelastic.If a good’s price elasticity is 0 (no
amount of price change produces a change in demand), it is perfectly inelastic.If price
elasticity is exactly 1 (price change leads to an equal percentage change in demand), it is
known as unitary elasticity.The availability of a substitute for a product affects its elasticity.
If there are no good substitutes and the product is necessary, demand won’t change when
the price goes up, making it inelastic.

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