BUS 305 Handout 6 Spring 2019

Pricing Structure
Pricing is critical to the success of a business. Charge too much, and you may not be competitive;
charge too little, and you may not make enough money to survive or grow the business.

It is not easy to know what to charge. You have to balance the WTP on the part of the customer,
with the cost structure of the business. How high a price you can charge is limited by the WTP;
how low a price you can charge is limited by your cost structure.

You can change WTP if the product becomes very fashionable or desirable (e.g. iPhone, Gucci
handbag). You can change your cost structure through economies of scale (e,g. Amazon and
Walmart).

Pricing Mechanisms Here are nine different ways to set prices:

Fixed Menu Pricing Dynamic Pricing

Predefined prices based on static variables
List price
Fixed prices for the product or value offered e.g.
shirt in Yellow
Product feature dependent
Price depends on the quantity of features e.g. new
car in dealership
Customer segment dependent
Price depends on the customer segment
e.g. seat on a plane flight
Volume dependent
Price depends on how many is purchased e.g.
cotton yarn for factory
Pay as you go
Price depends on how much of a service or
system you use e.g. server space needed for
computing at different times
Prices changes based on market conditions
Negotiation (bargaining)
Price negotiated, based on bargaining power/skill e.g.
fruit in marketplace
Yield management
Price depends on inventory and timing of purchase e.g.
fish, or tailoring service at Eid
Real-time market
Price changes in real time based on supply and
demand e.g. stocks, electricity
Auctions
Price determined by competitive bidding
e.g. tea, sugar bought by brokers (middlemen)