Methods of Pricing

There are three basic methods of price:

  • Cost-based pricing
  • Competition-based pricing
  • Customer-based pricing


Cost-based pricing:

Cost-based pricing methods described begin with a product cost subtotal. To calculate product cost you need to include the costs of operating the business, which could include raw materials, transportation, advertising, wages, rent and other costs incurred in producing the product. Once you have a base cost, then add the profit level you want for the business to the product cost subtotal to determine your product price. The amount of profit you add to the product cost subtotal can be set according to the following three different methods:

  • Include a profit percentage with product cost (mark-up pricing)
  • Add a percentage to an unknown product cost (cost-plus pricing)
  • Price is a blend of total profit and product cost (planned-profit pricing

Competition-based pricing:

The big advantage of competition-based pricing is that you are focused on your industry and, therefore, your competition. The industry focus associated with competition-based pricing looks closely at the types of existing and emerging competition. Once you know what your competitors are doing, you can better decide how you will manage your business. You are able to charge a higher price if you can show how the product has a uniqueness or innovative quality and is ‘worth’ more for the value.

  • Price your product the same as the competition
  • Set your price to increase customer base
  • Seek larger market share through price

Customer-based pricing:

It also known as value-based pricing, is a system where the price is based on the customer ‘demand’ or need for the product. If the product is unique or innovative, a value-based price may help create a demand for the product or service.

  • Use price to support product image
  • Set price to increase product sales
  • Design a price range to attract many consumer groups
  • Set price to increase volume sales
  • Price a bundle of products to reduce inventory or to excite customers