TYPES OF PRICING STRATEGIES | MARKETING MANAGMENT| L-16|

A pricing strategy is a plan or approach that a company uses to set the price of its products or services. It involves analyzing factors such as the cost of production, competition, demand, target market, and desired profit margins, among others, to determine the optimal price point for a product or service.

There are several types of pricing strategies that businesses can use to price their products or services. Here are some common pricing strategies:

Cost-plus pricing:

Cost-plus pricing is a pricing strategy where the price of a product or service is determined by adding a markup (a percentage of the cost) to the cost of producing or providing the product or service. In other words, the selling price is calculated by adding a predetermined profit margin to the total cost of production or provision.

The cost-plus pricing method is often used in manufacturing industries where production costs are the primary driver of pricing decisions. It is also commonly used in government contracts and construction projects.

The advantages of cost-plus pricing include simplicity, stability, and predictability. It ensures that all costs are covered and that a profit is earned. Additionally, it can be a valuable tool for businesses just starting out or those with difficulty predicting demand or pricing their products or services.

However, the downside of cost-plus pricing is that it does not consider market demand or competition. It assumes that customers will be willing to pay a certain price, which may only sometimes be the case. Furthermore, if the cost of production increases, the price of the product or service will also increase, which could make it less competitive in the marketplace.

Here are some examples of cost-plus pricing:

Construction Projects: In construction projects, cost-plus pricing is commonly used. The contractor estimates the project’s cost, adds a percentage markup to cover overhead expenses and profit, and bills the client accordingly.

Government Contracts: When the government needs to procure goods or services, they often use a cost-plus pricing model. This pricing method ensures that the supplier covers all their costs and makes a profit on the sale.

Custom Manufacturing: Custom manufacturing companies often use cost-plus pricing to price their products. They estimate the cost of raw materials, labor, and overhead and then add a markup to the total cost to determine the final selling price.

Service Industry: In the service industry, cost-plus pricing is used to price hourly services such as consulting or legal services. The hourly rate includes the cost of labor, overhead, and profit margin.

Retail Industry: The retail industry may use cost-plus pricing for private-label products. The retailer sets the product’s price based on the production cost and adds a markup for profit.