Pricing Techniques

Lesson Objectives• Identify different pricing

strategies

• Define mark-up

1. Cost-Oriented Pricing•Markup Pricing

•Cost-Plus Pricing$

Markup Pricing

• Markup – difference between price of an item and its cost

• Usually expressed as a %

• Used by wholesalers and retailers

• Used for goods acquired for resale

Cost-Plus Pricing

• Used by manufacturers and service businesses

• Used for individual goods and services

• More customer-specific

• All fixed and variable costs are calculated, then desired profit added

2. Demand-Oriented Pricing

• Based on consumer perception of product value

• Effective when product demand is inelastic– Few or no substitutes– Necessity

• Effective when demand is based on time and/or place– Matinee theater tickets vs. evening tickets– Dugout vs. “nosebleed” seats

3. Competition-Oriented Pricing

• Prices based on what the competition does

• Not based on cost or demand

Competitive Bid Pricing

• Determining the price for a product on the basis of bids submitted by competitors

• Most gov’t agencies required to accept lowest bid for desired product

• Companies bid low and take lower profit in order to gain contract

Going-rate Pricing

• Used by most companies in some way

• Used by businesses whose competing products are very similar

• Company with highest market share usually sets the price

• Competing companies may– Price below– Price above– Price at

In reality, companies will use a combination of

these 3 strategies – not just one

Cost-oriented pricing

helps determine the price floor – the lowest price it can go to make a profit (remember break-even point)

Demand-oriented pricing helps establish a price range: price

floor (cost) to price ceiling

(consumer perceived value)

Competition-oriented pricing

allows company to determine how the price selected relates to the

competition