While starting a business or stepping into the business world, the term ‘pricing’ comes up often. In trade, it is a critical factor. In simple terms, pricing can be defined as adding value to a commodity. In the process of buying or selling a product at a particular price, both the seller and purchaser negotiate for mutual benefit, aiming at what is profitable for both parties.
In this article on the methods of pricing, you will receive detailed information on the concept of pricing, cost-based pricing, and cost-plus pricing methods, along with the factors influencing overall pricing.
Concept of Pricing
Pricing is one of the most important concepts when it comes to business. Since it means attaching value to the product, the process must be undertaken any time a person wants to sell or purchase. Every time a consumer subscribes to a service, they pay a value to the seller for the product they are investing in. During this process, both the seller and purchaser negotiate for mutual benefit, which is profitable for both parties.
The product’s price is determined by several factors, such as the raw material used, profits to be earned, and so on. The final value or pricing is given to the product depending on these factors.
Introduction of Price in Marketing
Every time you visit a shop to buy anything, you pay the price. Price can be defined as any amount a person pays to attain a product, service, or idea. Product pricing is the most crucial step when starting and running a business, as every profitable organisation is created to earn maximum profit. The shopkeeper attaches the tag to the item that the potential customer is willing to pay while simultaneously keeping a certain margin, which leads to growth and development in the future. Apart from this, several other approaches are considered while deciding the price of a commodity:
- Cost accountability
- Competition prevailing in the market
- Customers’ expectations of the product
The business’s success is highly influenced by the ‘right pricing policy’. It is a guideline decided by top-level managers for achieving exceptional product sales.
Methods of Pricing
The pricing method can be described as the process through which the value is asserted to a product or service to be sold to the final consumer. Several factors can influence the product’s pricing, including the product’s demand, market competition, and cost. Since the product price can leave a long-lasting impact on the business’s existence, pricing methods need to be studied thoroughly before one is adopted.
Cost-oriented Methods
The cost-oriented method of pricing is a traditional method that is widely used by most entrepreneurs even today. Further, this method is divided into three major parts: cost-plus pricing, target returning pricing, and markup pricing.
Cost-plus Pricing
In cost-plus pricing, the total cost of the product is calculated, which is further sold with a certain percentage of the owner’s profit.
Target Returning Pricing
The target return pricing is a popular pricing method, where the price is determined based on the target rate of return on the investment.
Markup Pricing
In this method, the specific percentage of product cost is added to the product’s end price to obtain the final price. Thus, the company decides to fix the product price in such a way that it can get the invested amount during the production stage.
Penetration Pricing
This method is a strategy used by most marketers to attract customers to their business. The product is sold at lower or discounted prices during its initial offering. The lower prices help attract more customers, thereby keeping the competitors away.
Market-oriented Methods
In the market-oriented method, the product price is decided based on the latest market trend and research. It is further divided into five major parts:
Perceived Value Pricing Method
The perceived value pricing method is where the product price is decided based on the customer’s expectations.
Value Pricing Method
This pricing method is when the company produces high-quality products at low costs.
Going-rate Pricing Method
The third is the going-rate pricing method, where the product price is decided based on other similar products available in the market.
Auction-type Pricing Method
The next on the list is the auction-type pricing method, where the product price is auctioned.
Differential Pricing Method
Finally, the differential pricing method is where the product prices vary from customer to customer. Prices of this type are mostly dependent on factors like area, time, and potential customers.
Skimming Pricing
Skimming pricing is another popular method that marketers use to elevate their product sales. Here, the firm charges the maximum price of the product in the initial stages and reduces the price with time.
Premium Pricing
Premium pricing is a pricing strategy where the product price is set higher than the prices of similar products.
Psychological Pricing
Psychological pricing is a practice where the price of the product is set slightly lower than that of the whole number. For example – 999, 599, and so on.
Factors Influencing Pricing
There are several factors that directly and indirectly influence the pricing of the product:
- Organisational factors
- Marketing mix
- Product differentiation
- Product cost
- Demand for the product
- Competition in the market
- Product supply
Determinants of the Marketing Price
Here is the list of primary determinants affecting the marketing price:
- Product cost
- Demand and utility
- Competition in the market
- Legal and government rules and regulations
- Pricing objectives
- Use of marketing methods
Conclusion
With this, we come to the end of the methods of pricing. When starting a new venture or a business, pricing is one of the most important concepts requiring attention. The shopkeeper attaches the tag to the item that the potential customer is willing to pay while keeping a certain margin at the same time, which leads to growth and development in the future.
In this article, we studied the concept of pricing, pricing in marketing, and methods of pricing in length. We covered several direct as well as indirect cost-based pricing and cost-plus pricing methods that organisations use to price their products effectively. Lastly, we discussed several factors influencing the price of a product.
