The difference between profit and bankruptcy. Pricing can mean everything and be the difference between success and failure.
There are a few methods commonly used by different organisations, all serve a purpose and have potential depending on the product and market the organisation operates in.
Cost Plus
This method of pricing is the simplest approach as it doesn’t require a broad understanding of customer behaviour or needs. It is simply taking the total cost of production and adding on a percentage to make the sale of the product profitable.
While having benefits with its simplicity, it fails to account the customer’s perceived value of the product. This results in the potential of losing out on a greater profit margin if the customer perceives it highly or it could result in fewer sales from being marked up too high for their perceived value.
Going Rate
This is the most common pricing method for commodities such as petrol, where price fluctuates with the price set in the broader economy. They can vary from this rate based on factors such as location.
Perceived Value
While this method requires significant levels of research and is much more complicated than the cost plus method it can result in much more accurate sales predictions.
This process involves identifying what customers would value a product through various research methods. This then allows the organisation to make the most of potential profit or reduce the risk of no sales from setting the price too high.
Sealed Bids
This is a method most commonly used in large building projects or construction and has somewhat of an auction type structure but in a race to the bottom.
The organisation funding a project would assess the suppliers competent in delivering and from those who are a bid would be put in. With the funding organisation most likely picking the supplier who can deliver at the cheapest price.
This bidding approach is a complicated process as far as analysing how to best enter the situation but can be very beneficial for an organisation to have suppliers ‘racing to the bottom’.
References:
Hooley, G, Piercy, N, Nicoulaud, B & Rudd, J 2017, Marketing Strategy & Competitive Positioning, 6th Ed., Pearson, Harlow, UK.
University Marketing Blog 