PRICING CONCEPTS a. Cost based pricing: i) cost plus pricing:In cost plus pricing, price of the product is the sum of cost plus profit margin. It is alsoknown as mark up pricing. It can be represented by:Price = AC + M, where AC = average cost, M = profit margin. ii) Marginal cost pricing:In marginal cost pricing, price of the product is the sum of variable cost plus a profitmargin. iii) Target return pricing:In target return pricing, a producer rationally decides the minimum rate of return that heproduct must earn. b. Pricing based on firm’s objectives:Firm may aim at maximizing profit or sales or growth or managerial function. i) Profit maximization:A firm which aims to earn maximum profit would naturally consider total cost of productionfor determination of price and hence will adopt markup pricing. ii) Sales maximization:Some firms maximize sales instead of profit maximization. Such firms will adopt competitivepricing. c. Competition based pricing:Degree of competition depends on entry and exit barriers. i) Penetration pricing:When a firm plans to enter a new market which is dominated by existing players, its onlyoption is to charge low price, even lower than the ongoing price. ii) Entry deterring pricing:In Entry deterring pricing, the price is kept low, thus making the market unattractive forother market players. iii) Going rate pricing:In going rate pricing, most of the players do not indulge in separate pricing but prefer tofollow the prevailing price in the market.
d. Product life cycle based pricing:Product life cycle based pricing refers to different pricing for a product at different stages ofits lifecycle. i) Price skimming:Under Price skimming, producers charge a very high price in the beginning to skim themarket and earn super margins on sales. ii) Product bundling or packaging:In Product bundling or packaging, two or more products are bundled together for a singleprice. iii) Perceived value pricing:In Perceived value pricing, value of the goods for different consumers depends upon theirperception of the utility of the good. iv) Value pricing:In Value pricing, sellers try to create a high value of the product and charge a low price. v) Loss leader pricing:In Loss leader pricing, multi-product firms sell one product at a low price to compensate theloss by other products. e. Cyclical pricing:Due to the ups and downs in the prevailing economic condition, this cyclical pricing exists. i) Rigid pricing:Rigid pricing states that firms should follow a stable pricing policy irrespective of the phaseof the economic cycle. ii) Flexible pricing:In Flexible pricing method, firms keep their prices flexible to meet the challenges of changein demand. f. Multiproduct pricing:There are 2 options for a multiproduct firm namely:It may produce and sell only its final product to the end consumer; and/or it may produceand sell products which are used as intermediary goods. Based on the product utility pricingdiffers and is termed as multiproduct pricing.
g. Ramsay pricing:Frank Ramsay gave a model for taxation, which suggested that the Government should levyhigh tax on the goods which has low elasticity and low tax on goods that has high elasticity. h. Transfer pricing:Transfer prices are the charges made when a company supplies goods, services or financialsto its subsidiary or sister concern. i. Peak load pricing:In Peak load pricing, different prices are charged for same facility used at different points oftime by the same consumers. Here, the time zone is divided into peak load and off-peakload pricing. Consumers using the product at peak load may pay high price and consumersusing the product at off peak period may pay low price for the facility. j. Sealed bid pricing:There is a separate market in which the buyer does not prefer an open market price butdemands that the sellers provide their rates in sealed form, commonly known as tenders.This mode of pricing is called sealed bid pricing. k. Retail pricing:Marketing channel includes at least 2 intermediaries’ namely whole sellers and retailers. i) Everyday low pricing: (EDLP)In EDLP strategy, a low price is charged throughout the year and none or very few specialdiscounts are given on special occasions. ii) High-low pricing:This method involves high prices on a regular basis, coupled with temporary discounts aspromotional activity. iii) Value pricing:In Value pricing, sellers try to create a high value of the product and charge a low price. l. Administered pricing:Administered prices are those that are statutorily determined by the Government.