The following pricing methods exist:
"Average costs plus profit";
break-even analysis and ensuring targeted profit;
pricing based on the perceived value of the goods;
pricing based on current prices;
pricing based on closed trades.
Pricing using the “average cost plus profit” method.
The easiest way to pricing is to charge a certain markup on the cost of goods. The size of margins vary widely depending on the type of goods.
Pricing based on break-even analysis and ensuring targeted profit.
The firm seeks to set a price that will provide it with the desired amount of profit. Such a pricing method requires the company to consider different price options, their impact on the sales volume necessary to overcome the break-even level and obtain a target profit, as well as an analysis of the likelihood of achieving all of this at every possible commodity price.
Pricing based on perceived value of the product.
An increasing number of firms, when calculating prices, begin to proceed from the perceived value of their goods. The main factor in pricing, they believe, is not the cost of the seller, but consumer perception.
Pricing based on closed trades.
Competitive pricing is also applied in cases when firms struggle for contracts in the course of tenders.
Depending on the tasks, the solution of which required the definition of the method of pricing, it is possible to group the methods differently. All pricing methods can be divided into three main groups, depending on what the manufacturing company or the seller is more oriented at when choosing one or another method:
costing methods of production - cost methods;
methods based on the assessment of market conditions - market methods;
on methods from the standards for the cost of the technical and economic parameter of production - parametric methods.
How to set the final price for the goods?
The determination of the final price for a product is a process consisting of six stages.
The firm carefully determines the goal or objectives of its marketing, such as ensuring survival, maximizing current profits, winning leadership in terms of market share or product quality.
The company derives for itself a demand curve, which speaks of the likely quantities of goods that can be sold on the market within a specific period of time at prices of different levels. The inelastic demand, the higher the price may be, appointed by the company.
The firm calculates how the amount of its costs varies at different levels of production.
The firm is studying the prices of competitors for use as a basis for price positioning of its own goods.
The firm chooses one of the following pricing methods: “average costs plus profit”; break-even analysis and ensuring target profit; pricing based on the perceived value of the product; pricing based on current prices and pricing based on closed trades.
The firm sets the final price for the product with regard to its fullest psychological perception and with mandatory verification that this price corresponds to the policies of the company practiced price policy and will be favorably received by distributors and dealers, the company's own sales staff, competitors, suppliers and government agencies.
Setting pricing objectives
First of all, the company has to decide what goals it seeks to achieve with the help of a particular product. If the choice of the target market and market positioning is carefully thought out, then the approach to the formation of the marketing mix, including the price problem, is pretty clear.
Ensuring survival becomes the main goal of firms in cases when there are too many manufacturers on the market and there is intense competition or customer needs change dramatically. In order to ensure the operation of enterprises and the sale of their goods, firms are forced to set low prices in the hope of a favorable response from consumers. Survival is more important than profit.
Maximize current profit
Many firms strive to maximize current profits. They estimate the demand and costs for different price levels and choose a price that ensures the maximum flow of current profit and cash and the maximum cost recovery. In all such cases, the current financial performance for the company is more important than long-term.
Determination of demand
Any price assigned by the firm, one way or another, will affect the level of demand for goods. If demand can be called elastic, sellers should think about reducing prices. Reduced price will bring more total revenue. And this approach makes sense as long as there is no disproportionate increase in production and marketing costs.
Demand, as a rule, determines the maximum price that a firm can request for its goods. Well, the minimum price is determined by the costs of the company.