Pricing Policy

How firms set the price of their goods and services is a complicated issue. The three
most common pricing methods adopted by firms are:

1- Cost-plus pricing:
A firm may calculate its average cost of the product, and then add a profit 'mark up',
say 15%, on to average costs. This mark-up could be changed to allow for the effects
of completion and economic conditions.

2- Managerial Cost pricing:

The firm calculates the additional cost of producing the next (additional) unit or set of
units of output and then charges a price (plus a 'mark-up') according to marginal cost.

3- Price discrimination:
Several firms are able to charge different consumers (businessmen and women,
children, senior citizens and students) different prices; and also charges different
prices according to the time of the journey, e.g. peak, off-peak, week-day, and
weekend.

In addition to adopting a particular pricing method, a firm can also follow a number of
pricing strategies or tactics such as:

1- Penetration Pricing:
The price is set lower than the price of competitors. A firm often uses this policy
when it is first entering a market and is trying to establish a market share. (It tends to
be used where the demand for the good is price elastic …).

2- Skimming Price:
The product is sold at a high price because some customers are keen to be the first to
have it. The price will eventually fall, especially when competitors enter the market.
This is very common with new products such as Apple’s products.

3- Loss-leader Pricing:
The firm offers a price below the cost of producing the item (hence making a loss) in
order to encourage the sale of other products. Supermarkets frequently adopt this
tactic to encourage people into the stores, and once inside they may buy additional,
items…

4- Limit-pricing:
Occurs when a firm which normally has a large market share drops the price of its
product to limit the entry of other new competitors.

5- Dumping Pricing:
Products may be sold at a loss simply to obtain some revenue from them, or in the
hope that it can establish a foothold in the market.

6- Competitive Pricing:
Is when the firm prices its product in line with those prices of its competitors.