Question

1. Describe the three pricing methods discussed in the textbook (cost-based, demand-based, competition-based).

Answer 1

Answer: Cost based Pricing Methods

Cost based Pricing is a method of Pricing by which some percentage of desired profit margins are added to the product cost to find the Selling Price of the product. Margin percentage is added to the cost to earn profit. For example, the cost of a product is 75 and then Company adds 25 as a profit to the cost, then Selling Price is 100. It can be expressed in percentage also like here profit margin is 33.33 % of Cost [(25/75)×100].

There are two types of cost based Pricing namely, Cost plus pricing and Mark up pricing. In cost plus pricing, a percentage of total cost is added to the cost of the product as profit, like in the example above. In Markup pricing, percentage of markup is calculated on Selling Price like, cost is 16 and markup percentage is 20% . This markup is 20% of sales i.e., profit is 20% of sales. Selling price will be (cost/ 1- markup percentage)= 16/(1-0.20) = 20. Selling price will be 20.

This is the most simple method of Pricing used by many companies. But it doesn't take into consideration the strategies of competitors.

Demand based Pricing

In demand based Pricing method, marketers sets the Price of the product according to the demand of the product. A product having high demand has a high price to gain more profit. A product having low demand will have llw Price so the company can attract new customers. This Pricing method's efficiency depends upon the ability of marketer to analyse the demand. This method of Pricing is used in industries like Hospitality industry or travel industry. As you may have noticed that the airline charges low price in low demand period and charges high price in high demand period.

Competition based Pricing

In competition based Pricing method the price of the product is set according to the prices set by competitors for similar product. A company sets its product's price according to the competitiors pricing strategy. A company can charge high, low or equal price for its products as charged by its competitors. In Airlines, some Airlines charge exactly same price for same routes. Sometimes Company charges price lower than its competitors to attract new customers and to increase the market share but it leads to price war among competitors.