Approaches to Pricing | Cost Based Pricing | Dynamic Pricing and Others

There are a number of approaches to pricing of a product or a service depending on various factors that contribute towards its production or creation. Let us understand the different types in depth.

Cost-based Pricing

This type of pricing is based on the primary expense of production, manufacturing, and distribution. Expense based pricing or cost added pricing is an easy pricing method where a set percentage is added to the production cost for a unit of the product.

This particular type of strategy comprises two pricing methods as cost-plus and break-even pricing. It disregards customer demands and competitor costs.

Example: Automobile Industry

The typical ingredients of costs based pricing are

1. Variable cost

It consists of direct supplies and consumables and depends on each unit of product or service.

2. Fixed costs

It consists of employee expenses, advertising costs and distribution costs. They do not directly depend on the product or service but have to be included.

3. Economic costs and gains

It consists of factors such as depreciation, interest, and return on investment.

Dynamic Pricing

Dynamic pricing is also known as demand pricing or time-based pricing is a pricing tactic where the companies set elastic prices for products or services taking into consideration the current market requirements. Businesses here consider algorithms of competitor pricing, demand and supply and various other external factors in the market and change rates accordingly.

Such a pricing strategy is used by industries such as hospitality, tourism, entertainment, retail, electricity, and public transport.

Example UBER

Many times people notice cab fares to be on the higher side compared to normal rates on a casual Saturday night. Such a pricing strategy is recognised as surge pricing or dynamic pricing. Companies make use of normal peak hours, bad weather conditions (rain, etc), events (concerts, movie premiere), traffic conditions, unseen emergencies and so on in their favour.

Systematic algorithms fuel the technique due to which businesses such as Uber cater to the demand-supply asymmetry.

DISNEY

During holidays and certain weekends, Disneyland surges its ticket rates compared to times when there is less demand. Disneyland in February 2020 inflated ticket costs, crashing the $200-a-day mark under its new five-tier pricing scheme that charges an extra amount on days that might have a higher demand.

A one-day pass to visit either Disneyland or Disney’s adjoining California Adventure Park costs around $104 on low demand days such as Tuesdays and Wednesdays in march whereas for peak days like Saturdays and Sundays, the cost of the tickets rise to a good $154 from $149.

Apart from this extreme pricing they also have three middle-priced tiers.

Competitor Pricing

Example – Pepsi vs Coke

This type of pricing suggests that companies set their offering’s price mainly depending on the competitor’s prices. In oligopolistic industries companies that deal with products such as steel, paper, or fertilizer ordinarily charge the same amount.

Small scale businesses follow the dominating brands in terms of pricing altering it when the dominating brand’s prices change instead of fluctuations in their own demand or costs.

Going-rate pricing strategy being considerably well-adopted is generally used when prices are challenging to measure or competitive response is uncertain. This turns out to be a good solution as companies believe it indicates the industry’s collective wisdom.

Auction-type pricing

Example – eBay

Such type of pricing involves a process of purchasing and selling the offerings of the firm by putting them out for a bid, securing the bids, and then auctioning the item to the highest bidder. An offer to spend a certain amount of money on anything that is being sold is called a bid.

This type of pricing is getting more popular, especially among electronic marketplaces selling things from apparels to used vehicles as companies dispose of extra inventories or used goods.

The three main kinds of auctions and their pricing systems are

1. Ascending Bids

This features one dealer and multiple buyers. Sellers put out items on online sites and bidders raise their offer prices until the best value is reached. The most high-priced bidder gets the item.

2. Descending Bids

This type could have either one dealer and several buyers or one buyer and several dealers. In the first case, the seller declares a high-end price for the product and then gradually reduces its rate until a bidder accepts. In the second case, the buyer declares something he or she desires to purchase, and the potential dealers strive to offer the lowest rate.

3. Sealed Bids

Here the providers offer only one bid and are unaware of other bids. Governments across the globe frequently use this technique to obtain supplies or to give licenses. A supplier does not bid lower than its cost but also cannot bid too high for fear of losing the job.

Value Pricing

Example

  1. One Plus Phones
  2. Value Meals and Combos at McDonald’s

The strategy is most prosperous when products are sold based on necessity, emotions, in niche markets and in shortages. Value price indicates a good value for money which means that the amount customers pay makes them feel that they got enough product worth the money they spent. Nevertheless, decreasing the cost not invariably increases the value.

The abovementioned pricing type is a method of fixing rates of products based on the consumer’s perception of their worth. BThe approach proves to be of greater help for brands that design products to improve consumer’s self-image and they pay a price entirely based on their perception of its value.