General Pricing Approaches

Bilal Hamid (BBE/ 537)

“The Price is what you pay; the Value is what you receive.”

Price

Price is the only element in the marketing mix that produces revenue;

all other elements represent costs.

Pricing Approach # 1

Cost-Based Approach

“Always low price. Always”.Wal-Mart

Cost-Plus Pricing

This pricing method, often utilized by resellers who acquire products from suppliers, ADDS a percentage on product cost to sell it.

A major general retailer, such as Wal-Mart, may apply a set percentage for each product category (e.g., women’s clothing, automotive etc.)

Unit Cost = Variable Cost +Fixed Cost

Expected Unit Sales

Variable Cost = 10Fixed Cost = 300,000Expected Unit Sales = 50,000

Supposes: -

Mark-up on Cost Method

= 1610 +300, 000

50,000

=16

1 - .2= 20Markup Price =

Unit Cost

(1 – Desired Return on Sales)

Manufacturer’s Cost per Unit: = 16

Manufacturer’s Mark-up per Unit = 20

Break-Even Analysis and Target Profit Pricing

Through the Break-Even analysis company first determine the minimum level of sales needed by product to break even with its total cost and then sets the suitable target price in support to gain the desired Target Profit through that sale.

If the company sets higher cost its sales will affect, and if company sets the lower cost so its profits. Therefore the company should set moderate price and search ways to lower fixed and variable costs to achieve the Target Profit.

For Example:

Product total fixed cost is $300,000 and the variable is cost $10 per unit.

If the company sells the product at the price of $20, then the company will required to sell 30,000 units to breakeven.

= # of units to Break evenFixed Cost

Price – Variable Cost

= 30,000300, 000

20 - 10

Formula:

Break-even chart

10 20 30 40 50

1,200

1,000

800

600

400

200

0

Total revenue

Total cost

Target profit

Fixed costCo

st (

tho

usa

nd

s)

Sales volume (thousands)

Break-even point

To Break-even with total cost the company should sale 30,000 on $20 / Unit.

Pricing Approach # 2

Buyer-Based Approach

“Things only have the value that we give them”. -Moliere

Value-based pricing

Value-based pricing is product driven.

The company sets its target price based on customer perceptions of the product value.

As a result, pricing begins with analyzing consumer needs and value perceptions, and price is set to match consumers’ perceived value.

For Example

For example, Montblanc pens sell for several hundred dollars or more. A less expensive pen might write as well, but some consumers place great value on the intangibles they receive from a "fine writing instrument.“

Value-Added Marketing: To justify higher prices in market competition many companies adopt value-added strategies .

For example: T.C.S courier service sends SMS alerts to their customer upon the successful delivery of their goods. This practice is called Value-Added Marketing.

Pricing Approach # 3

Competition-based Approach

“Competition creates better products, alliances create better companies.”

-Brian Graham

Going-rate pricing

Setting prices based on the prices that competitors charge for similar products.

The firm bases its price largely on competitors' prices, with less attention paid to its own costs or to demand. The firm might charge the same as, more than, or less than its major competitors.

Bid Pricing:

Bid pricing typically requires a marketer to submit a price to a potential buyer that is sealed or unseen by competitors

Bid pricing occurs in several industries though it is a standard requirement when selling to local, national and international governments. In these situations the marketer’s pricing strategy depends on the projected winning bid price, which is generally the lowest price.

“A smile is a facelift that's in everyone's price range!”.

-Tom Wilson