General Pricing Approaches

1. Cost-Based Pricing
a. Cost-Based Pricing
Adding a standard mark up to cost
ignores demand and competition
Popular Pricing Technique because:
It simplifies pricing process
Price competition may be minimized
It is perceived to be most fair to buyers and sellers
Example:
Variable Costs:
P 2 000 000
Fixed Cost: P 500, 000
Expected Sales:
100, 000 units
Desired Sales Mark up: 20%
(Variable Cost+ Fixed Cost) / Unit Sales = Unit Cost
(P 2 000 000 + P 500 000) / 100 000 units = P25 per unit
Unit Cost / (1-Desired Return on Sales) = Mark Up
Price
P25 / (1-.20) = P31.25
b. Break Even Analysis and Target Profit Pricing
Break even charts and shows total cost and total revenues
different levels of unit volume.
The intersection of the total revenue and the total cost curves is
the breakeven point.
Companies wishing to make a profit must exceed the break unit
even volume.

2. Value Based Pricing

 Uses buyers perceptions of value rather than sellers costs to set

price.
Measuring perceived value can be difficult
Consumer attitudes toward price and quality have shifted during the
last decade
Introduction of less expensive versions of established brands has
become common.
Business-to-business firms seek to retain pricing power
Value-added strategies can help
Value pricing at the retail level
Everyday low pricing (EDLP) vs. high-low pricing
3. Competition Based Pricing
Also called going rate pricing
May price at the same level, above or below the competition
Bidding for jobs is another variation of competition based pricing
Sealed bid pricing
Other Pricing Approaches
1. Market Skimming Pricing
Setting a high price for a new product to skim maximum revenues
layer by layer from segments willing to pay the high price.
2. Market- Penetration Pricing
Setting a low price for a new product in order to attract a large number
of buyers and a large market share.
3. Market Rate Pricing
Ceding the initiative to the key competitors to set the price.
Dangerous for leaving the strategic initiative to competitors.
Potential threat of Sudden Price Shift by newer, or Changes in
delivery system capability.
4. Relationship Pricing
Different price for Different class of customers depending on
relationship and the potentially of cross-selling or future business.