Methods of Pricing/Determining Price Levels

1. Cost-based pricing

i. Mark-up pricing – this involves adding a standard markup to the product cost .markups are higher on seasonal items, slower moving items and items with high sewerage and handling costs. A high mark up however may be disadvantageous if competitors prices are low. i.e. hotels peak mostly in holidays.

Advantages of high mark up

  • It is advantageous in that sellers can determine their costs more easily and hence by basing their prices on cost, they simplify the pricing task.
  • Where all firms use this pricing method, prices tend to be similar hence price competition is minimized.
  • Most people feel that pricing method is fair to both buyers and sellers.

ii. Target return pricing – the firms determines a price that will yield its target rate of return on investments. If the firm doesn’t reach expected unit sales, the marketer can prepare a break even chart to learn what would happen at other sales levels based on different prices. The manufacturer will then uses different prices and estimate the probable impact on sales volume and profits.

2. Value based pricing

iii. Perceived value pricing – Companies based their price on customer perceived value. They see the buyers perception of value and not the sellers cost as the key to pricing e.g. a car manufacturer may price his car at a million while his competitor charges 90,000.he may explain the difference due to longer warranty of the car, superior services, superior durability etc.
iv. The customer will be convinced that such a car operating costs will be lower and hence buy the more expensive car.
v. Value pricing-companies charge a low price for low quality goods and a high price for high quality goods. The price must reflect a high value offer to customers.

3. Competition based pricing.

v. Going rate pricing – the firm’s basis its price largely on competitor’s prices. Smaller firms follow the leader changing their prices only when the market leaders change their rather than when their own demand or costs change. Some firms may charge a slight premium or a slight discount but they preserve the amount of difference to minimum.

vi. sealed bid pricing – this is where a company submits sealed bid for jobs. The firm bases its price on expectations of how competitors will price and for a firm to win a contract, it has to submit the lowest price bid, however it cannot price below costs and neither can it compromise on quality, hence a firm will bid a price that will maximize the expected profits in the long –run.

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