Explain the Approaches of Pricing

 The company can select one or a combination of three general pricing approaches: The cost based approach (cost-plus pricing, break-even analysis and target profit pricing); the buyer based approach (perceived value pricing); and the competition based approach (going rate or sealed bid pricing).

 1.  Cost based pricing:

Cost Plus Pricing: The simplest pricing method is cost plus pricing- adding a standard markup to the cost of the product. e.g.  Lawyers, accountants and other professionals typically price by adding a standard markup to their costs.

Breakeven Analysis:

Target pricing uses the concept of a breakeven chart. A breakeven chart shows the total cost and total revenue expected at different sales volume levels. Variable costs are added to fixed costs to form total costs, which rise with volume. Breakeven volume can be calculated using the following formula:

       Fixed cost

Breakeven volume: __________________

price – variable cost

 The manufacturer should consider different prices and estimate breakeven volumes, probable demand and profits for each. Even though the low price attracts many buyers, demand still falls the high breakeven point and the manufacturer loses money. To achieve the target return, the manufacturer will have to search for ways to lower fixed or variable costs, thus following the breakeven volume.

 2.  Buyer based pricing:

An increasing number of companies are basing their prices on the product’s perceived value. Perceived value pricing uses buyers perception of value, not the seller’s cost, as the key to pricing. The company uses the non-price variables in the marketing mix to build up perceived value in buyers minds. Price is set to match the perceived value.

            A company using perceived value pricing must find out what value buyers assign to different competitive offers. If the seller charges more than the buyers perceived value, the company’s sales will suffer. Many companies overprice their products, and their products sell poorly. Other companies under-price. Under-priced products sell very well, but they produce less revenue than they would if price were raised to the perceived value level.

 3.  Competition based pricing:

Going rate pricing: In  going rate pricing, the firm bases its price largely on competitors prices, with less attention paid to its own costs or to demand. The firm might charge the same, more, or less than its major competitors. Going rate pricing is quite popular. When demand elasticity is hard to measure, firms feel that the going price represents the collective wisdom fo the industry concerning  the price that will yield a fair return. They also feel that holding to the going price will prevent harmful price war.

Seal bid pricing: Competition base pricing is also used when firms bid for jobs. Using sealed bid pricing, a firm bases its price on how it thinks competitors will price rather than on its own cost or on the demand. The firm wants to win a contract, and winning the contract requires pricing lower than other firms.