PRICING AND METHODS OF PRICING

Pricing, as the term is used in economics and finance, is the act of setting a value on a product. While the basic concept is extraordinarily simple, many wonder about whether price and cost are the same. Although the two are used almost interchangeably in informal speech, in more formal business discussions price and cost are not at all the same. Price is what the buyer pays for the product or service. Cost is the seller's investment in the product subsequently sold.

Pricing method can be seen as the process of ascertaining the value of a product or service at which the manufacturer is willing to sell it in the market. The cost, market competition and demand are the three significant factors which influence a product’s price.

Following are some of the pricing methods:
1. Cost Plus Pricing: Cost-plus pricing is one of the simplest ways of price determination. A certain percentage of cost is added as a profit margin to the value of the product to acquire the selling price.
2. Break-Even Pricing: This method is similar to break-even analysis, here the company needs to price the products such that it generates profit after recovering the fixed and variable costs. The selling price should be equal to or more than the break-even price (the point at which the sales revenue matches the cost of goods sold).
3. Mark-up pricing: Mark-up pricing is a variation of cost pricing. In this case, mark-ups are calcu­lated as a percentage of the selling price and not as a percentage of the cost price. Firms that use cost-oriented methods use mark-up pricing.
4. Target return pricing: In this case, the firm sets prices in order to achieve a particular level of return on investment (ROI).
5. Going-rate pricing: In this case, the benchmark for setting prices is the price set by major com­petitors. If a major competitor changes its price, then the smaller firms may also change their price, irrespective of their costs or demand.
6. Area pricing: Here different prices are charged for the same product in different market areas. For instance, a firm may charge a lower price in a new market to attract customers.
7. Perceived value pricing: A good number of firms fix the price of their goods and services on the basis of customers’ perceived value. They consider customers’ perceived value as the primary factor for fixing prices, and the firm’s costs as the secondary. The customers’ perception can be influenced by several factors, such as advertising, sales on techniques, effective sales force and after-sale-service staff. If customers perceive a higher value, then the price fixed will be high and vice versa.

Thus, pricing plays an important role in every stage of a product (i.e. introduction, growth, maturity & decline) and is an essential factor to determine the success of the business.