Pricing method or strategy is the route taken by the
firm in fixing the price.
The method/strategy must be appropriate for achieving
the desired pricing objectives.
3. Pricing methods
1. Cost Based Pricing
Types of cost based pricing
Mark-Up Pricing(cost plus pricing)
Absorption cost pricing (full cost pricing)
Target rate of return pricing
Marginal cost pricing
4. Mark-up pricing
• The selling price is fixed by adding Mark-up or
Margin to its cost.
• Usually used by:
Distributers, Marketing firms etc..
• Slower the turnaround of the product larger the
margin and vice versa.
5. Absorption cost pricing
• Mainly used by manufacturing firms.
• It uses standard costing techniques.
• It includes :
– Fixed cost
– Variable cost + PROFIT
– Selling and administering cost
– Advertisement cost
• It is also known as full cost pricing.
6. Target rate of return pricing
• Similar to Absorption cost pricing.
• The difference is in fixing the profit margin.
• The profit margin/ mark up is fixed by considering
• Firm will have return objectives, like 5% of invested
capital, or 10% of sales revenue.
• Then you arrange your price structure so as to achieve
these target rates of return.
• Market leaders or monopolists uses this pricing strategy.
7. Marginal Cost Pricing
• It takes cost and demand into consideration while
fixing the price.
• It aims at maximizing contribution towards fixed
• It gives flexibility to recover the fixed cost
depending on the market condition.
• It also gives flexibility in recovering a large portion
of cost from certain segment and a small portion
from some other segment.
8. Pricing methods
2. Demand Based Pricing
The pricing decision is also depending on Demand and
supply of the commodity.
More realistic .
Types of cost based pricing are:
• What the traffic can bear pricing
• Skimming pricing
• Penetration pricing
9. “What the traffic can bear”
• The seller sets the maximum price the buyers are
willing to pay in giver circumstances.
• It will bring a high profit during this period.
• Chance of error in judgment are very high.
• Can be used in the following conditions.
– Shortage of goods
10. Skimming Pricing
• Initially the products will be introduced in a high
price and subsequently settle down for a lower
• Example: Mobile Phones, Televisions etc.. Most
of the electronic items.
11. Penetration pricing
• Initially introduced at a lower price and increases
its price as its demand in the market increases.
• Good to capture new market.
• Opposite of skimming.
• Keep the product out of competition for longer
• Example: DTH Services, Magazines, TV channels
12. 3. Competition Oriented Pricing
• It need not mean that pricing the commodity
matching its competitors, it can also be the
– Premium pricing
– Discounted Pricing
– Parity Pricing/going rate pricing
13. 4.Product line pricing
• The products in a given product line are related to
• The manufacturing cost of these products also will
not be much different.
• The need not price the product optimally but it
may price the product line optimally.
• It is mainly indented to get optimum profit from the
Example: Pulsar 150, 180, 200, 220
14. 5.Tender pricing
• Industrial products
• The customers go by competitive bidding through
• The seller can only get the best possible price.
• He should thoroughly analyze the competitors.
15. 6. Affordability based Pricing
• Essential commodities
• Social welfare pricing
• The idea of this pricing is to make the product
available to the targeted population at an
• Items usually distributed through public
• Subsidies may be involved
• Example: Chick shampoo , Akash, medicine etc.
16. 7. Differentiated pricing
• Different price for the same product in different location.
(SanDisk cruzer blade Pen-drive, Petrol )
• The price difference may also be made in the case of
• Volume of purchase. ( Offer packs Lux soap, Colgate value