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Major Pricing Methods

August 7, 2009

Pricing Methods:

The use of a specific type of information on prices to represent the evolution of price in price index compilation. The specific type of information specifies the Method.

Pricing Mechanism:

The in which price comes about between economic actors. Important difference between pricing method and pricing mechanism is in place between economic actors, while pricing method is employed by statisticians.

The main interrelated with statisticians and pricing methods is,

a)      Unique product transactions are not periodically pricable and have to be reduced to standardized repricable unit.

b)      Complex products have to be reduced to manageable unit E.g. Telephone.

c)      There is limited knowledge about complex products whereby the issue of pricing to constant quality become difficult.

d)      Limited human resource

e)      Representaiveness of small product panel is problematic.

The major four ways of calculating pricing:

Cost-plus pricing:

Set the price at production cost, including both cost of goods and fixed costs at your current volume, plus a certain profit margin.

E.g.: cost of  Pen is Rs.40 Cost of Raw material + production cost + Current sales

Add whit fixed cost as Rs.30 so comes with Rs.70 per unit.

Add some % of markup value as 10% is equal to Rs.7

So finally the pen is comes with price of Rs.77 per unit.

Target return pricing:

This method sets the price to achieve a target return-on-investment (ROI).

E.g.:  $10,000 invested in the company

Expected sales volume is 1,000 units in the first year

Need to make $10,000 profit on 1,000 units, or $10 profit per unit

So manufactures sets $60 per unit.
Value based pricing:

Price product based on the value it creates for the customer. This is usually the most profitable form of pricing.

The most extreme variation on this is “pay for performance” pricing for services, in which you charge on a variable scale according to the results achieves.

E.g.: Nokia Mobile phones saves the typical customer $1,000 a year in, say, energy costs. In that case, $60 seems like a bargain – maybe even too cheap. Product reliably produced that kind of cost savings, easily charge $200, $300 or more for it, and customers would gladly pay it.

Psychological pricing:

This method ultimately, takes into consideration of the consumer’s perception of price, this method figuring things like,

Positioning: The manufacturer want to be the “low-cost leader”, must be priced lower than others competition. If they want to signal high quality, they should probably be priced higher than most of others competition price.

Popular price points: There are certain “price points” (specific prices) at which people become much more willing to buy a certain type of product.

Fair pricing: This doesn’t matter what the value of the product is, even if you don’t have any direct competition. There is simply a limit to what consumers perceive as “fair”.

Guidelines to combing above things for calculation of pricing,

>> Price must be enough higher than costs to cover reasonable variations in sales volume.

>> The manufacture to make a living.

>> Price should almost never be lower than your costs or higher than what most consumers consider “fair”.

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