Cost-plus pricing is also known as ‘ mark-up pricing ’, ‘ average cost pricing ’ and ‘ full cost pricing ’. The cost-plus pricing is the most common method of pricing used by the manufacturing firm. The general practice under this method is to add a ‘fair’ percentage of profit margin to the average variable cost (AVC).
The pricing strategy varies from stage to stage over the life cycle of a product, depending on the market conditions.
i. Introduction stage:
A new product may simply be either another brand name added to the existing ones or an altogether new product. Pricing a new brand for which there are many substitutes available in market is not a big problem as pricing a new product for which close substitutes are not available.
There are two type of pricing strategies for new product.
Skimming price policy :- Selling a product at a high price, sacrificing high sales to gain a high profit, therefore ‘skimming’ the market. Usually employed to reimburse the cost of investment of the original research into the product - commonly used in electronic markets when a new range, such as DVD players, are firstly dispatched into the market at a high price.
2. Penetration price policy :- This pricing policy is adopted generally in the case of new product for which substitutes are available. This policy requires fixing a lower initial price designed to penetrate the market as quickly as possible.
Maturity period is the second stage in the life cycle of a product. It can defined for all practical purposes as the period of zero growth rate. The concept of maturity period is useful to the extent it gives out signals for taking precaution with regard to pricing policy.
The product in decline is one that enters the post-maturity stage. During this stage, the total sale of the product start declining. The first step in pricing strategy at this stage is obviously to reduce the price with the objective of retaining sales at some minimum level.
Many producers enter the market often with a new brand of a commodity for which several substitute are available. For example, cold drink like Coke and spot were quite popular in the, market during 1980s when new brand like limka, Thums up, Pepsi were introduced in the market.
Generally three type pf pricing strategies are adopted in pricing a new product in relation to its well established substitudes :-
Pricing below the market price :- This strategy gives the new brand an opportunity to gain popularity and establish itself.
Pricing at Market price:- Pricing at par with the market price of the existing brand is considered to be the most reasonable pricing strategy for a product which is being sold in a strongly competitive market.
Pricing above the existing market-price :- This strategy is adopted when a seller intends to achieve a prestigious position among the seller in the locality.
In this strategy, we turn to a kind of pricing in which a firm is required to quote its price under uncertain cost and price condition with a view to winning a contract or a tender. This kind of pricing is known as competitive bidding or contract pricing. Competitive bidding is a process of quoting a contract price for supplying goods or services under specified term and condition.