Posted in Marketing and Strategy Terms, Total Reads: 2111
Definition: Pricing Methods
Pricing methods are the methods that firms use to calculate the price of their products. Pricing is one of the toughest challenges encountered by the firms as the prices should not only be relevant as per the current market scenario, but should also meet the expenses of the firm and help it gain profit. It must also take into account competitor’s pricing. Hence, it is important to choose the right pricing method. The various pricing methods are as follows :
a. Cost plus pricing – After calculating the total production costs, a target profit margin is levied on it.
Eg – If the production cost of a pen is Rs 100 and the target profit margin is 10%, then the price of pen would be 100 + 10% of 100 = Rs 110
b. Targeted return – Total investments are determined and a target rate of return is applied to it to attain the desired return on investment.
Eg – If the investments in the production of a cup are Rs100 and the target rate of return is 5%, then the price of the cup will be 100 + 5% of 100 = Rs105
c. Value pricing – The price is calculated based on the value being provided to the customers.
Eg – If a personal coaching for 10 days in a particular subject is equivalent to attending a coaching class consisting of 20 students for 20 days, then the person would be willing to even pay the fee that he pays for the coaching classes for his personal tuitions (assuming that the coaching class charges higher fee than the personal coaching).
d. Psychology pricing – Pricing is based on the psychological impact that the price would produce on the customers.
Eg – These days we see a lot of products are priced at a rupee less than some round figure (say Rs 199 instead of Rs 200). This is so because the customers respond positively to such prices.