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Cost-plus pricing

Main article: cost-plus pricing

Cost-plus pricing is the simplest pricing method. The firm calculates the cost of

producing the product and adds on a percentage (profit) to that price to give the sellingprice. This method although simple has two flaws; it takes no account of demand andthere is no way of determining if potential customers will purchase the product at thecalculated price.

Price = Cost of Production + Margin of Profit.

Creaming or skimming

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 theoriginal research into the product commonly used in electronic markets when a newrange, such as DVD players, are firstly dispatched into the market at a high price. Thisstrategy is often used to target "early adopters" of a product or service. These earlyadopters are relatively less price-sensitive because either their need for the product ismore than others or they understand the value of the product better than others. Thisstrategy is employed only for a limited duration to recover most of investment made tobuild the product. To gain further market share, a seller must use other pricing tacticssuch as economy or penetration. This method can come with some setbacks as it couldleave the product at a high price to competitors. [1]

[edit] Limit pricing

Main article: Limit price

A limit price is the price set by a monopolist to discourage economic entry into a market,and is illegal in many countries. The limit price is the price that the entrant would faceupon entering as long as the incumbent firm did not decrease output. The limit price isoften lower than the average cost of production or just low enough to make entering notprofitable. The quantity produced by the incumbent firm to act as a deterrent to entry isusually larger than would be optimal for a monopolist, but might still produce highereconomic profits than would be earned under perfect competition. The problem with limit

pricing as strategic behavior is that once the entrant has entered the market, the quantityused as a threat to deter entry is no longer the incumbent firm's best response. This meansthat for limit pricing to be an effective deterrent to entry, the threat must in some way bemade credible. A way to achieve this is for the incumbent firm to constrain itself toproduce a certain quantity whether entry occurs or not. An example of this would be ifthe firm signed a union contract to employ a certain (high) level of labor for a long periodof time.

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[edit] Loss leader

Main article: loss leader

Loss Leader: Basic Concept In the majority of cases, this pricing strategy is illegal under

EU and US Competition rules. No market leader would wish to sell below cost unless thisis part of its overall strategy. The idea of selling at a loss may appear to be in the publicinterest and therefore not often challenged. Only when the leader pushes up prices, it thenbecomes suspicious. Loss leadership can be similar topredatory pricing orcrosssubsidization; both seen as anti-competitive practices.

[edit] Market-oriented pricing

Setting a price based upon analysis and research compiled from the targeted market. Alsowith the cost price.

[edit] Penetration pricing

Main article:penetration pricing

The price is deliberately set at low level to gain customer's interest and establishing afoot-hold in the market.[2]

[edit] Price discrimination

Main article:price discrimination

Setting a different price for the same product in different segments to the market. Forexample, this can be for different ages or for different opening times, such as cinematickets. Market orientated pricing is also a very simple form of pricing used by very newbusinesses. What it involves is, setting the price of your product/service according toresearch conducted on your target market. It holds good in case of: price sensitiveconsumers existence of large mass market intence competition in the market

[edit] Premium pricing

Main article: Premium pricing

Premium pricing is the practice of keeping the price of a product or service artificiallyhigh in order to encourage favorable perceptions among buyers, based solely on the price.The practice is intended to exploit the (not necessarily justifiable) tendency for buyers toassume that expensive items enjoy an exceptional reputation or represent exceptionalquality and distinction.

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[edit] Predatory pricing

Main article:predatory pricing

Aggressive pricing intended to drive out competitors from a market. It is illegal in some

places.

[edit] Contribution margin-based pricing

Main article: contribution margin-based pricing

Contribution margin-based pricing maximizes the profit derived from an individualproduct, based on the difference between the product's price and variable costs (theproduct's contribution margin per unit), and on ones assumptions regarding therelationship between the products price and the number of units that can be sold at that

price. The product's contribution to total firm profit (i.e., to operating income) ismaximized when a price is chosen that maximizes the following: (contribution marginper unit) X (number of units sold).

[edit] Psychological pricing

Main article:psychological pricing

Pricing designed to have a positive psychological impact. For example, selling a productat $3.95 or $3.99, rather than $4.

[edit] Dynamic pricing

Main article: dynamic pricing

A flexible pricing mechanism made possible by advances in information technology, andemployed mostly by Internet based companies. By responding to market fluctuations orlarge amounts of data gathered from customers - ranging from where they live to whatthey buy to how much they have spent on past purchases - dynamic pricing allows onlinecompanies to adjust the prices of identical goods to correspond to a customerswillingness to pay. The airline industry is often cited as a dynamic pricing success story.

In fact, it employs the technique so artfully that most of the passengers on any givenairplane have paid different ticket prices for the same flight.

[edit] Price leadership

Main article:price leadership

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An observation made of oligopic business behavior in which one company, usually thedominant competitor among several, leads the way in determining prices, the others soonfollowing.

[edit] Target pricing

Pricing method whereby the selling price of a product is calculated to produce aparticular rate of return on investment for a specific volume of production. The targetpricing method is used most often by public utilities, like electric and gas companies, andcompanies whose capital investment is high, like automobile manufacturers.

Target pricing is not useful for companies whose capital investment is low because,according to this formula, the selling price will be understated. Also the target pricingmethod is not keyed to the demand for the product, and if the entire volume is not sold, acompany might sustain an overall budgetary loss on the product.

[edit] Absorption pricing

Method of pricing in which all costs are recovered. The price of the product includes thevariable cost of each item plus a proportionate amount of the fixed costs. A form of costplus pricing

[edit] Marginal-cost pricing

In business, the practice of setting the price of a product to equal the extra cost ofproducing an extra unit of output. By this policy, a producer charges, for each product

unit sold, only the addition to total cost resulting from materials and direct labour.Businesses often set prices close to marginal cost during periods of poor sales. If, forexample, an item has a marginal cost of $1.00 and a normal selling price is $2.00, thefirm selling the item might wish to lower the price to $1.10 if demand has waned. Thebusiness would choose this approach because the incremental profit of 10 cents from thetransaction is better than no sale at all.

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