What is Keystone Pricing?

Keystone Pricing Strategy in retail

Oh! Those good old days of retail! The competition not so stiff and the prices soaring high! Quite a
golden period, wasn’t it? It was! And it was so to a large extent because of a relatively simpler
technique of price determination – Keystone Pricing.

What is Keystone Pricing?

The pricing strategy that made olden days of retail quite hassle-free and lucrative was this method of
price determination – Keystone Pricing. Under this method, a product is priced at directly ‘double the
wholesale price’.

How does Keystone Pricing work?

Let’s make it simpler with this example: You are a retailer selling beautiful, exquisite jewellery. You
have bought an ornate necklace from a goldsmith at $ 200. Here, according to the traditional
Keystone Pricing Strategy; the price at which you’ll sell it to your customer will be 100% on your
cost i.e. the wholesale price. So, the retail price becomes $400.

so, here the profit margin of $200 is 100% of the cost price and 50% of the final retail selling price.

Are retailers acting as robbers in plainclothes when they are literally ‘selling at double’?

Well, it may sound outrageous when you discover that a retailer ‘enjoys’ a 100% margin on the
products that he sells. But it isn’t as simple as it seems. Though the retailers charge the markup of
100% under Keystone Pricing, those 100% entirely don’t go in his pockets.
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Product cost i.e. the price paid to the wholesaler for procuring the product is a major, primary cost.
There are a plethora of expenses yet to be met. These are expenses connected to running the business
smoothly such as rent of the shop, electricity bill, taxes, salaries of the staff etc. These are known as
secondary expenses or overheads.

in order to recover his overheads, the retailer, especially with the small set up, has to add a margin up
to 100% of his cost on the products. Otherwise, it may become difficult for him to survive in the
market.

In what kind of retail setups does Keystone Pricing work?

Though it may sound primitive, this fairly simple technique of pricing the products is still used by
many small businesses. However, its popularity and ubiquity is fast diminishing because of the
intense competition from e-commerce.

This is because not having a brick-and-mortar model lends competitiveness to their pricing models
and they can still be in the business at lower margins.

Mega retail set-ups like Walmart also don’t follow Keystone Pricing because their huge variety of
merchandise, holding capacity and humungous sales volumes are more than enough to recover their
overhead costs. Hence, these retail giants also give a tough competition to small retailers in terms of
pricing strategy.

Specific businesses that can employ Keystone Pricing

Small town retailers can successfully use keystone pricing method because of lesser competition and
loyal customer base. There is less competition because the small size of the town may not justify the
presence of big-ticket retailers.

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These small town retailers can, in turn, build a loyal customer base by responding to the specific
requirements of their shoppers and also adding a personal touch by offering personalized services on
special days for the customers.

Businesses into selling unique antiquities, highly sophisticated brand can also afford to resort to
Keystone Pricing as the demands for their products is price-inelastic and ever-rising irrespective of
price levels.

Advantages of Keystone Pricing

Simplicity The primary advantage of Keystoning is that it is very easy to calculate. Hence, a
retailer in a small set up doesn’t have to invest in complex systems to manage his accounts and
inventory. That task can be managed by deploying smaller amount of resources.

Where Keystone Pricing may not be a right pricing strategy?

1) When a retailer doesn’t have product differentiation

Keystone Pricing can easily pay off all the retail expenses or ‘overheads’ conveniently because of a
very healthy, fat markup above the cost of the product; but, if you are a business that has been selling
similar products and as a result, facing fierce competition from online stores, then Keystone Pricing
may not be an apt pricing strategy for you as it cannot help business withstand the price war.

However, the brick-and-mortar stores have that personal connection with their customer base and
they can convert the same into sales of higher value, making up for the volume lost to the e-
commerce.

The same logic applies to the online stores also. If they price their products too high, they will
definitely lose to their competitors. But if they add the right amount of product differentiation, they
can still justify their higher prices by creating a niche customer class.

2) When inventory turnout is more important Here, it costs more to keep the unsold inventory
like storage costs, insurance, costs of wear and tear etc. Hence, if the markup is too high, the goods
may lie unsold and business may incur losses on both the fronts – storage costs of unsold goods and
non-recovery of primary and overhead costs of the same.

Conclusion – Choose the best pricing policy for your business

Thus, it is advisable for any business – whether small or big – to be flexible in its approach towards
price determination rather than looking for a universal solution. For some products, Keystone pricing
may prove to be helpful while for others it may nearly kill the business. Hence, the retailer has to use
his discretion and business acumen here in choosing the most befitting pricing policy. He can always
resort to multiple prices under his roof to satisfy both – price conscious and class-conscious
customers.

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Multiple Unit Pricing: When you should use it,
and the Pros and Cons
Selling a product at a price lower than that of other products of the same category is called Multiple
Unit Pricing. This is true, especially in case of bulk orders.

Let us breakdown the definition. A product is sold at a pre-decided price, which is equal or less than
the maximum retail price or list price of the product. But to increase the sales of the product or to
uplift the number of customers, retailers or even companies have offers and give freebies.

Usually, the free product is the same product which is purchased in bulk, and it comes at either lesser
or free of cost — for example, One bar of soap-free on purchase of 4 bars of soap.

So one bar is priced at $1.25, but customers can get 5 for $5. This reduces the effective net price of
the product per unit. When should you use Multiple Unit Pricing?

Multiple Unit pricing is a pricing strategy which is used as a marketing strategy to push the sales of
the product. Following are few of the times when Multiple Unit pricing is used:

#1. Higher Sales by Multiple Unit Pricing

The strategy of Multiple Unit Pricing is used either by organizations or retailers to push their product
for higher sales. Higher sales are targeted to achieve higher market potential and higher conversion of
the customers.

Higher sales are also a concern in the case of target achievement. When the target of the sales team is
to be achieved, and the duration for Sales closing is very less, in such cases, high sales becomes a
priority, and Multiple Unit Pricing is used.

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#2. Exhausting existing stock

When the companies or the retailers have a stock lying for several days, which may border on expiry
or be near expiry, in such cases the stock is tried to finish off within the given date, and multiple-unit
pricing is used in such cases.

It is mandatory, especially in case of pharmaceutical products or other consumer care products that
they should not be sold after expiry dates and in such cases, the stock should be thrown off or
disposed of suitably, which will be invariably loss for everyone.

To avoid such losses, multiple-unit pricing is used, and the stock is liquidated by providing bulk
offers.

#3. Market Penetration with new products

Most of the times when a product is launched, it has to face the competition of existing products. The
existing products have been in the market for a long time and have a bigger and wider customer base.

Combating an established product in the market requires a penetration strategy which will not only
increase the customer base but also increase sales of the product over competition and provide an
edge over the competition by increasing the market share.

Multiple unit pricing is coupled with Market penetration strategy to promote new products and
penetrate the existing share of products in the product.

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#4. Customized Deals

Multiple unit pricing is also used in case of customized deals. When there are bulk orders and
customized deals, the buyer expects a better price on the products. Few free units are coupled with the
order in order to reduce the per product price, thereby implementing Multiple Unit Pricing.

Multiple unit pricing is used in customized deals in case of dealing with supplier-manufacturer deals.
For example, the deal is that on purchase of 100 units of a certain product, the supplier will get ten
units for free of cost, the buyer can propose a deal of buying 500 units of products at one time and
request for 60 units free.

#5. Penetration with existing products

When organizations want to increase the existing share of the products, multiple-unit pricing is
provided. This not only increases sales but also gets a number of customers and penetrates existing
share of the products in the market.

Example, to increase the sale of Pantene Shampoo it will be coupled with offers of Buy 4 Get 1 Free
or Buy 1 Get one free.

Pros and cons of Multiple Unit Pricing

Pros:

1. Multiple unit pricing helps in faster liquidation of the products. The stocks are consumed
faster, which helps to get more sale per unit of time for the organization.
2. It helps the customers or buyers to get a better deal and reduces the per-unit price of the
product.

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 3. It helps new products to establish themselves by providing affordable prices to the customers
and providing lucrative prices. This makes the product more economic ergo attractive to the
customers.

Cons:

1. Multiple unit pricing reduces the profit margin of the products for the companies. Not only the
companies, but it also reduces the profit margins of middlemen like retailers and distributors.

2. Dealing with multiple unit pricing is cumbersome in case of record keeping. Multiple unit
pricing is difficult to maintain in accounting books.

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Markdown Pricing – Different Types of
Markdown Pricing Explained
Making changes in your business strategies with the change of the market trend is important to stay
relevant. Retailers must keep themselves up to date about the products that they sell.

Merely knowing the products will not ensure the success of your business. You should learn about the
different market strategies to be ahead in the game. For example, when to cut down the price of the
products to attract more and more customers.

In this article, you will learn about markdown pricing and different types of markdown pricing.

What is Markdown Pricing?

To cut down the actual price of the products to increase the sale is called markdown pricing.
Promotional events and sales strategies are used by retailers to enhance the sales of products, but
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prices of the products are kept same, and in markdown pricing strategy the same amount of product is
sold at a lower price for the same purpose.

Retailers use this strategy because it has commonly seen that people tend to buy more (even when
they don’t need) when there is a drop in the price of the pr0duct if retailers are selling products at a
markdown, that doesn’t mean that they are selling at a loss.

That means they are selling products at a lower profit. For example, you mark down the price of a
jam jar by $10 from the market price $30. The jam jars were initially bought at $10 per unit.

You are still making $10 profit by selling the jam jar at $20. Markdown strategy will help you to sell
your stock fast but at a lower profit.

Purchasing retail products is not about trend or fashion, but it is about the right calculation. You
should know how and when you are going to sell products that you are going to make an investment
to purchase.

Having the lack of knowledge about how to sell products to make a profit and sold them out before
they go out of trend otherwise you will end up making bad investments, and ultimately you will have
to mark down the prices on the products to be able to sell them. In this way, you will incur a loss.

However, markdowns can be avoided. But doing markdown correctly can be healthy than losing
money on products getting old sitting on your store shelves. Markdowns bring customers in the store
and keep it alive and fresh.

Most retailers believe that their products will be sold out at their original price if they keep them in
store for a little long time. But they should think that if their customers did not buy their products
early then, there is a very low chance that they will buy it later.

Therefore, in such predicament, it is a smart strategy to mark down the prices of products and sells
them off as soon as possible. Never forget that something is always better than nothing.

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How can Small Businesses Manage Inventory to Utilize Markdown Pricing
strategy?

The amount of your profit highly depends on your decision to purchase inventory. If you are buying
products without under the influence of the salesman and without making calculations on how much
you will be able to sell in your store in one season, then you will end up piling up old products in
your inventory and either you will be forced to sell them at lower prices, or you have to discard them
because of their expiration date have crossed, or they are not in the condition to be sold in the store.

Follow the rule of “one-third.” Which means selling first one-third of products at full price and one
third at 25% discount and so on.

When to use Markdown Price?

Buying products and marking down the price of the products is not a good strategy. You should know
when to mark down the prices of products before you end up having expired or out of trend products.

To do this, you should make the use of your calendar to mark down the price of products with time.
Markdown the price only if the product has remained in the store for a long period of time.
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For example, some retailers mark down the price of a product if it has been on the shelves for more
than two months. The markdown of the price should not be a random decision. You should mark
down the price of the product at regular intervals.

Dating Of The Products

Do calculation and prepare an order based on the last year sales and place an order of the only amount
that you know you can sell within that period. You can also make a deal with your supplier for the
products that are about to expire and ask them to replace the products with the extended expiry date.

It is difficult to make such arrangements with your suppliers, but if you are giving them business then
they will surely get ready to such business conditions, and if you have already bought products that
you can sell in your store then you can easily avoid such conditions and if you have calculated
number of products than you will have to sell less number of products at markdown pricing.

Follow techniques mentioned above to avoid markdown pricing or to make a profit from markdown
strategy too. A calculated markdown of price can prove to be profitable as well as attracting
customers to store.

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Skimming Pricing Strategy
Innovation comes at a cost. If you are going to bring a unique product, you need to invest in R&D,
think out of the box and take a risk of launching the new product. When you are doing all this, you
would off course keep the price of the product high to get the benefits in return. Hence, many
companies which are innovative will use the skimming price strategy.

What is Skimming price?

Skimming pricing is used when a product, which is new in the market or just launched, is sold at a
relatively high price because of its uniqueness, benefits to customers or its current Wow factor.
However, slowly but surely when the product gets older in the market, then the price is dropped and
the product is brought at competitive pricing.

Skimming price is mostly used for technological products where the product demand is not
consistent. The typical product which is launched with a skimming price strategy is unique to the
market, has customers who are ready to pay a premium for the product, and is far ahead from the
competition.

Furthermore, due to the high price, the correct positioning is obtained for the product which helps in
reaching the right target audience. Remember that premium customers want to be unique and they
want products which are status symbols. All these factors are achieved with the use of skimming
price strategy. Thus, skimming price is a smart strategy for smart marketers. And here on we take an
example of the smartest marketer ever – Apple.

Example of Skimming price strategy

When IPhone 4s was introduced in the market 4 years ago, its price was huge. Few people could
actually afford an IPhone. With the passing of time, prices of the IPhone 4s have decreased gradually,
such that nowadays many people can afford an iPhone. A few days ago IPhone 7 has been launched
in the market. Before that Iphone 6 was launched.

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Both these phones sold in large quantities and at a very high price. In fact, after long debates and
reviews regarding the quality and the increased price of the phone, people decided to wait until they
will be able to buy the Iphone 7. Presumably, the price of the current IPhone 7 will decrease
drastically in the next year.

The strategy that Apple is using is known as the skimming pricing strategy. And Apple is only just an
example of one of the companies performing skimming price, but the list can go on and on, especially
in the electronics industry.

As it can be understood from the Iphone example, the strategy that Apple is using consists keeping
the highest initial price that the first customers will pay and as soon as the demand of the first
customers is satisfied (commonly known as innovators group), the company will lower down the
prices over time.

But if we were to think in matter of perspective, then you wouldn’t buy an IPhone 4 now because it
will be inferior to the current Iphone. This can be one big disadvantage of the skimming price
strategy, as the companies can develop negative publicity if they lower the price too fast and without
significant product changes.

The initial purchasers can feel frustrated and ripped off by the changes in prices for the same product
that they have purchased at higher costs. Basically the ones that are initially targeted are the
early adopters, and when product reaches into the maturity stage prices drop in order to target the
more price sensitive segments. The word-of-mouth is also a useful part, as the early adopter will also
play the role of spreading the news and convince relatives and friends to purchase the respective
product.

However, depending on the barriers to enter the market, in the long-run, profitability will decrease as
new entrants are going to approach the same market, lowering the prices.

A quite good example of skimming price can involve the Chinese companies which can come up
in a short notice with a cheaper copy of the IPhone 6.

In other words, the skimming price strategy has the following main benefits:

 To create an effective segmentation, and acquire maximum profit from each segment (the first
segment to be attracted will be the status conscious customers)
 Benefit from high short-term profits due to the novelty of the product
 Good return on the initial investment/set-up costs, which is done while introducing into the
market a new product will involve costs in marketing, research and development, etc.

Taking into consideration this strategy, you should also pay attention to the legislation. Price
discrimination by itself is illegal. By selling the same product to different segments for different
prices you are considered to make price discrimination. However yield management is not illegal.
Meaning that you manage to control your inventory and sell it for the right price and people, it is also
what can be translated as skimming pricing.

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Finally to end up with another example let’s take air seats in a plane, which is an example of reverse
skimming price. When the seats of an airplane are available, they are priced at lower rates because the
demands are also low. But as soon as the days go by and the date of the flight approaches, the prices
go drastically up because the demand increases. Thus, this in itself is an example of the reverse
skimming price strategy. In general, innovation and technological advantage is a must to get
skimming price from customers.

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What is Marginal Pricing?
Fixed and variable costs are the two major costs in the current business. Variable costs are those that
vary with the volume and outcome of the sales. Fixed costs do not depend on the level of sales.
Marginal Pricing, also called, Marginal cost-pricing comes under the idea of variable costs.

It bases a product’s selling price on the variable costs of its production and includes a margin and
ignores any fixed cost. The selling price can also be a little higher than that of the variable.

Marginal pricing is done in the case of short-term cases like if a company cannot make a sale at a
higher price and it has no other choice if it wants to make a sale, or if there is a tiny amount of unused
production capacity left which is available for use if the financially healthy company chooses to just
to maximize its profit.

The sales are always increment based on these short-term pricing strategies as these prices fall under
the lower range. This variable price constitutes the direct materials needed and not direct labour.

The Marginal Pricing is based on this paradigm called the ‘Marginal Transmission Pricing Paradigm’
which says that the new transmission costs because of the new transmission customer will be
included in the evaluation of transmission charges for the same customers. It will remain the
responsibility of the present customers’ utilities.

Where is Marginal Pricing concept useful?

Marginal Pricing takes care of the manufacturing costs but not the overhead costs. The low prices
attract customers benefitting the business. This high demand would bring profits and higher revenues
when compared to products of high price range and comparatively low demand. This brings the idea
of a short-term revenue boost’ to mind.

Also Read 5 reasons pricing strategy is increasing in importance

Marginal cost pricing is a concept which requires the presence and use of alternate markets. A
supplier or company cannot sell its products at the full retail price at one section of the market and the
marginal rate at another section of the same market.

This is where alternate markets come into play. Careful marketing has to be performed when the
prices are being set for the local market and the import market. The advantage is usually on the
exporter’s side as the import market will find it hard to compare the import prices and the exporter’s
local market prices. Since it can also be disadvantageous (We will come to that at the end of the
article) for the importing market, the export-import business using marginal pricing should be short
term, like non-seasonal sales and maybe right after the construction and set up of a new plant.

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The entirety of this should be strategized and executed carefully. Research and analysis say that a
trade-off occurs between the risk and efficient pricing. Marginal cost pricing seems to be optimal
when the marginal utility of the customer does not depend on the price. It says that the tariff’s ‘lump-
sum element’ should be greater than that of the fixed cost when the demand is the same as the fixed
cost and with unit elasticity.

Examples of Marginal Pricing

Let’s look at examples to understand this concept in a better manner.

 We have been mentioning that this concept works only on a short-term basis and marginal
pricing works therefore on a time limit. You can find marginal pricing being employed in
year-end sales and seasonal sales where retailers and stores give huge discounts on seasonal
clothes or other items that are considered to be outdated. You will find that woollen clothing
is cheaper in the summer than in the winter. So, marginal pricing can be viewed as a concept
that can add additional tiny revenue and profits to a company.
 Locational Marginal Pricing or just locational pricing is seen in rural areas especially in the
electric service sector because of congestion, diminished service and losses are faced due to
old generators and power lines that are not maintained leading to their low efficiency. Here,
customers pay one price in one location and for the same service pay another price in a
different location. This is called locational marginal pricing. One of the prices is the full retail
price and the other is the cheaper marginal pricing.
 Marginal pricing is also used by the travel industry. Airlines, resorts and hotels need a
minimum number of seats or rooms filled or the minimum number of people checked in to
achieve a profit. When they are underbooked, they not only not get in revenue but also face
losses due to maintenance costs and employee salaries that have to be fulfilled however the
business is running then. There are websites that have bidding facilities so that customers can
name the price they would like to pay such that underbooked places can get in some revenue.
 Some companies make the prices such that they are lower for products in lower demand and
higher for those in higher demand. This is discrimination in price.

Also Read Captive product pricing explained with examples

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Advantages of Marginal Pricing

As we have already seen, marginal pricing is most optimal for short-term solutions and this makes
sure that one need not worry about the effects it will have on fixed costs of maintenance and
overhead. It majorly focuses only on what has to be done to achieve profits and to equalize the
amount of labour or investment.

Disadvantages of Marginal Pricing

But marginal pricing always reminds you that there is always the risk that you may not recover the
total fixed cost price and it will also get difficult to increase the prices as customers get used to the
lower price and may not continue with the product once prices increase.

ACCESSORY SALES

Advantage:

Several products have accessory items. Marginal pricing gives way to accessory sales which is very
profitable for a service provider or retailer. It can make these pricing strategies very viable and also
boost the margins. The cellphones can be considered as an example. The service can be considered
the main accessory and other accessories can be the cellphone charger, earphones, cell phone charger
and the USB cord. The cell phone itself can then be sold at a lower price as the summation of the
entire cost containing the prices of all the accessory will be profitable in the long run as this offer will
appeal to the audience. This will reap them high profits in the future with their products in large
demand.

Disadvantage:

All of this does sound promising, but even this has its minus point. The minus point contradicting the
advantage is marginal cost pricing for products that do not have accessory items. The above point
would definitely not apply then.

CUSTOMERS WHO ARE PRICE-SENSITIVE

Advantage:

Lower prices usually lead to higher demand and incremental profits. Lower prices can also show a
level of increase in the number of units sold. It is said to be a new way to be employed while entering
the market promoting a new product

Disadvantage: Customers can be price-sensitive (most are, nowadays) and will mostly not
subscribe or buy the product anymore if prices are increased to compensate the rising fixed cost of
production.

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MARKET PRICES

Advantage:

It is advantageous for short-term benefits. It makes the brand high-quality and high-service when the
strategy for pricing is the promotional and short term. It can also help faster entry into the market. But
it will lead to the gain of several customers who are price sensitive.

Disadvantage:

Marginal cost pricing doesn’t consider the market prices. The market rates are not included when the
prices are being quoted.

Another perspective of marginal pricing that has been brought up is of the government of the
importing country. It is said that this concept of marginal cost pricing may be viewed as dumping.
Dumping is the marketing or selling of a product at a lower price in the foreign or importing market
when it is being sold at the domestic market for a higher price. The foreign market tends to feel
threatened on behalf of their competing industries from unfair competition and seek protection. The
exporting companies can face imposition by the importing government. It can be of high
countervailing dues to correct the price imbalance.

Another flaw is that the exporting company might shift its focus to the local market as soon as there
seems to be an increase in sales in the domestic market itself. This can cause tiffs and mistrust among
countries and foreign buyers where their trust will sway even when it comes to other suppliers in the
same market. This way, even a tiny careless mistake can cost a part of the nation’s economy.

Hence, companies employ this strategy when they realize they can earn additional revenue by selling
excess unsold products. It is not to be included in a long-term plan as it would definitely bring losses
to the company by the minimal revenue. Marginal cost pricing is surely opening new doors for
combatting periodical revenue issues and for soaring sales.

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What is Cost-Plus Pricing and why it is a good
Pricing Strategy?
Cost-plus pricing keeps the price of products and services in such a manner that it covers the cost of
production and provides sufficient profit margin for the firm to reach its target rate of return. In other
words, the company decides the margins that it wants from the product, and then adds the margin on
top of the cost to come to a selling value. Thus, the mark up pricing or cost-plus pricing method can
provide the company with an overview on how much profit they are going to have.

Calculation of Cost-plus pricing

The calculation or computing of the cost-plus pricing takes into consideration the average variable
and average fixed costs as well as the quantity, which is assumed based on an evaluation of the firm’s
production capacity.

Therefore, we have the average cost derived from the multiplication of average variable cost and
average fixed cost. The average variable cost is calculated by dividing the total variable cost by
quantity. This is the initial phase in computing the cost-plus pricing.

AVC= TVC/Q
AFC= TFC/Q

AC= AVC+AFC

Where – AC is Average cost.

AVC is average variable cost
AFC is average fixedcost
TVC is total variable cost
TFC is total fixed cost
Q is total quantity

The following and last step consists in identifying the mark-up over costs. Here we introduce a target
rate of return, which is a ratio of the respective share of total profit. If the target rate of return is x,
then the equation of the unit of output would be:

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Unit of output = X/Q

Where – X is rate of return and Q is total quantity.

The final price through the cost-plus pricing strategy will be:

P= AVC+AFC+X/Q.

This pricing has been considered the most rational approach to maximizing profits due to the ease of
its calculation and lack of need to any additional information. Therefore, compared to competitive
pricing, the cost up pricing strategy tends to ignore the competitors completely when establishing the
price.

At the same time, it also ignores the consumers which is its drawback. In order to determine the profit
margin it is essential to take into consideration also the management perception, the demand elasticity
as well as the competitive conditions. After all, the main interest of managers is to focus on
emphasizing the product’s maximum value.

Application of Cost-plus pricing for Business

This strategy can be applied in markets where there is a lack of information in uncertain markets. As
it is hard to gain a certainty on how your demand curve is going to fluctuate, the strategy offers a
general price.

Moreover, as it is working for uncertain markets, for the managers is easier to know more and be sure
about production costs rather than consumers and competitors behaviors. The simplicity and
availability of this strategy is what makes it quite popular among companies.

Dating back to medieval times, the present strategy is being used in USA as well as China and India.

However, the strategy can offer wrong perspectives. If we were to take for example a piece of
furniture produced in China, the way to calculate the price through the cost-plus pricing strategy is to
identify the cost of production and add the profit margin you wish to achieve.

But it depends on the sales target as if the sales are low than you have expected than you might result
in losses. Another thing is that if the Chinese company tries to sell its furniture in China but also on
international markets, such as France, the success of the company depends highly on customers’
behaviors and perceptions, as French people will believe that the Chinese products are of poor quality
if the prices are set lower than their expectations.

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Advantages of Cost-Plus Pricing strategy

This pricing strategy takes the cost of manufacturing a product, or providing a service into
consideration. A profit markup is added on top of the cost and the customer is given the final price
which is cost + profit. There are several reasons that we think Cost-plus pricing is the best pricing
strategy today.

1. Pricing can become your core competency

If pricing is your advantage, and you are giving the best pricing in the market, than it becomes very
difficult to imitate you. If your pricing is already cost-plus, and there is only so much margin you can
have, than you become almost impossible to imitate. As a result, you get one of the strongest core
competency any company can have – Price. Examples include Walmart and other retail chains which
fight the market on the basis of price.

2. Competition is very smart

Competition is very smart and it can imitate the same features that you are offering. However, adding
features comes at a price. When your competition is adding same features as yours, the competition
price will likely increase. When it comes down to price war, your pricing will be better. Thus, you are
one up on the competition due to the cost-plus strategy.

3. Digital price checking

Today, most customers check for the price of the product online. Because cost-plus pricing gives you
a pricing edge over competition, it is natural that you will be chosen more frequently, when people
are taking online decisions. This is because you are better priced than the competition. This fact is
assuming that your product is equally good as well.

4. Budget buying Many people prefer budget buying. Imagine situations such as an economic
downturn, or in general negative feelings in the market. In such times, people prefer budget buying.
Similarly, customers of the SEC B and SEC C segment will always prefer budget buying. All these
customers can easily purchase your products thereby giving you more segments to tap.

5. Challenges for Cost-plus pricing The challenge is to keep the cost down. Without keeping the
cost down, the pricing strategy fails. This is because if your cost is already high, and plus you are
adding profit on it, than your price becomes very high for the market. And you probably lose market
share.

Conclusion on Cost plus

Thus this pricing can become the best pricing strategy for your product or your service provided that
you maintain and prune the costing such that it is below the industry standard.

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https://www.marketing91.com/unit-price/

Unit Price – Definition, Examples and

Calculations
February 19, 2020 By Hitesh Bhasin Filed Under: Pricing

You must have faced situations when you are supposed to compare
prices of items that are not sold in equal quantities. If it has confused
you a bit, then let me tell you here that by knowing the unit price of
those goods, you can easily make the comparison.

In simple terms, Unit Price is the system that tells the price of a
consumer good in terms of any standard unit of measure. With the help
of unit pricing, you will get the cost per kilogram, cost per liter, cost
per dollar, etc. of the items that you plan to buy or sell.

In this article, we will dive deep into the concepts of Unit Price, and
understand what it is, how it works, and how you can calculate the unit
price of any good. So, without any further ado, let us get started-

Table of Contents

Introduction to the concepts of Unit Price

There are certain times when it becomes make to decide whether a

bigger package would be able to provide you with more value or not
when you are trying to shop from a proper store.

However, there is a method that you can use to determine that and we
are going to talk about it a little bit.

Have you ever heard of the unit price?

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Well, when you are checking the unit price of the item, you can know
the value of the product in the best way depending on the cost that it
has.

Also Read Optional Product Pricing: Meaning, Advantages, and Disadvantages

Hence, Unit Price plays quite a significant role in helping businesses in

making more prudent buying decisions so that they can appreciate the
better returns on investments.

Let us now have a closer look at the definition of Unit Price-

Defining the Term Unit Price

Unit price is the cost per quantity of the product that you are trying to
buy.

Now the quantity could be per unit of measurement or item as well,

which includes ounces, gallons, liters, grams, and so much more.

To calculate the unit price, one needs to make sure that they are
correctly deciding the total cost that the product has with the quantity
that they can receive. Also, you can go ahead and check out the shelf
label of the product to know that as well.

After that, you can easily compare the unit price that two different
packages have to determine which one has more value.

Doesn’t that seem like something that you would want to do in the first
place? We can guarantee that this unit price is going to help you out in
the best way.

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How Does Unit Pricing Work?

Now you must be wondering how the unit price system works to help
the businesses/consumers in finalizing the best business deals?

Well, we are going to answer that question for you right here and right
now so that you can have an idea in the best way.

With the help of unit pricing, there is no doubt that consumers are the
ones that are going to be the most benefitted. They can easily compare
some of the prices of different goods that are packaged and determine
the value.

If you have two packages that don’t sell equal quantities, then you can
easily check out the unit price to know which will provide you with
more profit in the first place.

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Also Read Geographical pricing and its application in Marketing

That is probably one of the main reasons why people want to try
finding out the unit price in the best way possible. With the unit
pricing, the shopper can tell which product would be a better buy. So
when it comes to comparing the products while buying, the unit price
provides you with an accurate idea.

Understanding the Basics of Unit Price

When you want to make sure that you are able to calculate the unit
price in the right way, there are some things that you need to always
keep in mind. These things are going to help you get some great results
for sure.

You need to have a proper understanding of the basics when you are
starting on the whole process of finding out the unit price. Well, you
can check out some items on the shelf first. There are some prices
mentioned there.

These are the prices that are applied to the entire package. This is not
the unit price for sure.

If you want to find out the unit price, then you also need to check out
the quantity of the product on the shelf. This will let you know how
much you will be paying for every single unit.

The process is pretty simple.

All you have to do is divide the price with the quantity, and you are all
done.

Let us now have a look upon the steps of calculating and comparing the
Unit Price so that you can get the best bargains-

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Two Steps of Calculating and Comparing Unit Price

1) Calculating Unit Price

 First of all, you need to check the total price of the item
 In the second step, you should find out the quantity of the item that the package contains
 Now, you should make sure that both products have the same unit of measurement
 Finally, you should divide the total price of the product by the quantity to get the unit price

Also Read What is Marginal Pricing?

2) Comparing the Unit Price

 Perform the calculation of the unit price of goods you are thinking to buy
 Opt for the item that has the lowest unit price
 Always make sure that the quality of both the items is the same
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Let us now understand how you can calculate the unit price with an
example-

Examples of Unit Price Calculation

1) Choosing the best bargain for Olive Oil

Suppose you need to find out the most profitable option from

2 liters of olive oil at $4.80

or

1.5 liters of olive oil at $2.40

In this example, your unit will be 1 liter, and the Unit Prices will be:

$4.80 / 2 liters = $2.4 per liter

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$2.40 / 1.5 liters = $1.60 per liter

So the lowest Unit Price (and the best bargain) is 1.5 liters of olive oil
at $2.40.

2) Choosing the Lowest Unit Price of Pencils

Suppose you need to choose the best bargain from

11 pencils for $5.00

Or

7 pencils for $2.70

Then the unit cost will be

$5.00 / 11 = $0.45 per pencil

$2.70 / 7 = $0.38 per pencil

So the best bargain deal for you would be 7 pencils for $2.70.

Unit Price Wrap Up!

So, that is all you need to know about the unit price and how to find it.
We are pretty sure that it helped you out in the best way.

Being well adept in the concepts of calculating unit price is quite

essential for making the right business decisions that can ensure better
profit margins for you.

What are your thoughts about the importance of Unit Price in making
effective business decisions? Are you having any doubts about the
pg. 28
calculations of the unit price? Feel free to share your queries with us in
the comments below.

If you liked this article, we bet that you will love the Marketing91
Academy, which provides you free access to 10+ marketing courses
and 100s of Case studies.

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