Companies have a variety of pricing methods to choose from that are founded by either a single or a mixture of one of the umbrella terms: cost, demand, and competition.
But what exactly is a pricing method?
It’s a method used to assist businesses with determining how to set the price of their items. Selecting a pricing method is a struggle across all companies because so many factors are at play. For instance, not only should the price be relevant based on the market at the time, but it should also be able to cover the cost of making the item. Making sure that a profit is made from the item is yet another aspect that must be taken into account when setting the price. On top of that, businesses can’t neglect to monitor how their rivals are pricing their items, too.
It’s imperative that you choose the right method, or a combination of them, or else your company is headed towards the gutter. That’s why you must thoroughly research the market of the item and the customers interested in it. It’s recommended that you don’t just follow what your competitor’s do. An alternative to that would be competition-based pricing, which we’ll get into down below. However, first off, let’s begin with cost-based pricing.
In cost-based pricing, a percentage of the entire cost of producing an item is added to the price of an item to set the final price. The amount added on is the profit that’s desired.
This has been pinned the easiest method for setting an item’s price. Here, a fixed-price, also known as the markup percent, which is essentially the profit made, is added to the final cost of the production of the item to determine the price. This method is especially prominent in manufacturing companies.
For instance, if it takes $100 to produce an item and then $0.50 is added as a markup for each one, then the final price ends up being $150 because a 50% profit margin goal was added to it.
Using this method, it’s easy to calculate the price since little information is needed. It also guarantees sellers from any unexpected cost adjustments. The problem, though, is that it doesn’t take into account the pricing strategies that rivals are using and the impact of customers.
This pricing method helps determine the price of an item depending on the demand for it. When there’s a lot of demand, then the price is raised because the company understands that consumers are willing to purchase the item regardless of the price, thus allowing them to make the most that they can off of the item. This is when a profit is made because consumers are paying a lot more than the item is worth. However, when there isn’t much of a demand, then the price is decreased with the hopes of gaining the attention of potential buyers.
This can be accomplished successfully, granted the correct analysis is made of the demand. It’s often used by airlines. Their demand shifts depending on the season.
When businesses utilize this pricing method, they are taking into account the prices of their rivals in order to determine the price of their goods. It’s up to them to price it either higher, lower, or just as their competition has the item priced.
This can be seen with airplane ticket prices. The price tends to remain very similar across all airlines. It’s typically accomplished with the help of pricing software, which helps automatically track the prices of rivals.
When trying to build a loyal customer base, this is the pricing method that’s typically used. Here, items are usually priced low for the more quality items. This is due, in part, by the fact that prices are determined based on how consumers perceive the value of it to be, which is often lower than it actually is. Through research and testing, cheaper ways to produce an item are figured out, but not at the expense of the quality of it.
This type of value-based pricing is often used for exclusive, luxury items. A high price is set as a way to show that the item is of high value.
In this case, prices are determined based on how they’ll influence consumers psychologically. Here, consumers make decisions based on their emotions rather than what’s logical.
For instance, today, the majority of items are priced a cent under the full dollar. $5.99 looks a lot more appealing than $6.00 because the first number is 5 instead of 6, which is typically the only number that shoppers look at. As you can see, there’s no significant difference, but since consumers think illogically in this scenario, companies benefit from them thinking with emotions and thus make a profit.
This pricing method is based on how the item is priced. It embodies strategies such as penetration, skimming, and loss leader pricing.
In this case, the price of the item at first is low. This item tends to be new. It’s useful because the item can get a market share with the help of that initial, low price. As soon as the item is established in the market, the price of it goes up to what it actually should be.
Here, the initial price is very high. This new item usually has a big demand. As soon as the desired profits are made, or the demand decreases, the price goes down to what it costs.
Here, the item is initially priced considerably low in order to grasp the attention of buyers. This helps lure in customers. As soon as they’re in the store or the website, there’s now a chance that they’ll also purchase other items as well. The placement of loss leaders is incredibly important. The items that surround the loss leader should be ones that shoppers need. Those items should also be priced higher in order to cover the cost of the loss leader and make a profit as well.
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