Marketer sets prices by selecting a general pricing approach that includes one or more of the approaches stated below, (a) Cost Based Approach
- Cost Plus Pricing
- Break Even Pricing or Target Return Pricing
(b) Buyer Based Approach :Perceived Value Pricing (c) Competition Based Approach
- Going Rate Pricing
- Sealed Bid Pricing
Cost plus pricing: It determines the number of units likely to be sold, calculating the direct cost per unit and add a percentage to cover overhead costs and profit. The method is based on adding a particular percentage of desired return (mark up) to the total cost/ unit.Illustration: Following are the costs and expected sales: Variable cost = $20.00 Fixed cost = $3, 00,000 Expected unit sales = 50,000 units Manufacturer wants to earn a 30% return (mark up) on sales. Solution: Unit cost = Variable cost + fixed cost/unit sales=20+fixed cost/unit sales=$26Mark up Price =unit cost/ (1-desired return on sales =26/1.03 Rs. 37.10 The marketer would charge Rs. 37.10 to earn a return of 30% on sales. Advantages of cost-plus method are as follows:
- If there are few buyers of the product, pricing can be justified.
- The policy is appropriate, where future demand of the product is difficult to forecast.
- It is long term policy, change in prices may be justified.
- Public utility services like railways, post offices, electricity etc. are priced on the basis of cost to the services.
Disadvantages of cost-plus method are as follows:
- This method is totally based on cost concept. But the reality is that costs do not influence the prices whereas prices influence the cost.
- The costs of joint products are difficult to be calculated correctly. They are only estimated.
- The method ignores the two very important factors— demand and supply forces and competition situation-in fixing the prices.
Break even or target return pricing: Under this method, the firm first determines the breakeven point i.e., the volume which is required to sell at least to reach the no profit- no loss situation. Target pricing uses the concept of break even chart. A break even chart shows the total cost and total revenue expected at different sales volume levels.Perceived value pricing: An increasing number of firms are basing their prices on the product’s perceived value Perceived value pricing uses buyers’ perception of value, not the sellers cost, as the key to pricing. The company uses the non-price variables in the marketing mix to build up perceived value in buyers mind. Price is set to match the perceived value. Different buyers often have different perceptions of the same product on the basis of its value to them. A cup of tea is priced differently by hotels and restaurants of different categories, because buyers assign different value to the same item. A company using perceived value pricing must find out what value the buyers assign to different competitive offers in terms of products’ quality, features and attributes like color, size, durability softness, look etc For example, consumers could be asked how much they would pay for the Coca Cola (normal size bottle) in the different surroundings, such as at a kiosk, at the door of a hospital, at a family restaurant, at a hotel, at an elegant restaurant, in a cinema hall, at a fast food shoppe in the Pragati Maidan’s fair etc. Sometimes consumers are asked how much they would pay for each benefit added to the offer. If the marketer charges more than the perceived value, the firm’s sales will suffer. Overpriced products sell poorly. Conversely, under-priced products sell very well but they produce less revenue than they would give it prices were raised to the perceived value level. (iv) Going rate pricing: The firm bases its price largely on competitor’s price. The firm might charge the same, more or less than its major competitors. The smaller firms follow the leader. They charge their price according to the change in the price of the leader. Going rate pricing is very popular now days as a pricing approach. (v) Sealed bid pricing: Here, the firm bases its price on how it thinks competitors will price rather than on its cost or demand. The firm wants to win the contract and winning the contract requires pricing lower than other firms. Yet the firm cannot set the price below a certain level. It cannot price below cost. On the other hand, the higher it sets its price above its costs, the lower its chance of getting the contract. Know more about the general pricing approach only at the University Canada West, one of the best universities in Canada, offering various business and management related programs.