Basic Methods of Price Determination Following Points Must Be Taken Into Consideration Before Fixing the Price of a Product. Costs Competition Demand Legal Considerations Elements of Marketing Mix Etc. However, Major
Basic methods of price determination
Following points must be taken into consideration before fixing the price of a product.
Costs
Competition
Demand
Legal Considerations
Elements of Marketing Mix etc.
However, major determinants of price are - Costs, competition and demand. Based on this there are three major approaches to setting the price of a product. They are:
1. Cost oriented pricing
2. Competition oriented pricing
3. Demand oriented pricing
Cost oriented pricing
In Cost oriented approach to pricing or cost based pricing the selling price of a product is determined by adding a percentage of profit to the product cost. There are two methods in cost oriented pricing. They are
1. Cost plus pricing and
2. Target profit pricing or break-even analysis.
Cost plus Pricing
Selling price of a product is calculated by aggregating all the costs of the product such as manufacturing cost, marketing cost and distribution cost plus a predetermined margin of profit. Giving below an example of cost plus pricing:
Particulars Amount $
Manufacturing Cost 60
Administration cost 6
Distribution Cost 6
Promotional and selling cost 8
Total Costs 80
Profit margin 10
Selling price 90
In this method the product cost include fixed and variable costs. It can be represented as follows:
Selling price = Variable Costs + Overhead Costs (Fixed Cost) + Profit.
Changes in the cost while changing the volume of production also needs to be taken into consideration before fixing the selling price. This method will help the manufacturer to secure his position in the market without any loss to the business. This method protect the interests of both the seller as well as the buyer and can be justifiable. The rate of profit margin vary from industry to industry and seller to seller. This method is useful when pricing the government contracts, where pricing of a contract needs to be estimated in advance. It can reduce the risk and
Following points must be taken into consideration before fixing the price of a product.
Costs
Competition
Demand
Legal Considerations
Elements of Marketing Mix etc.
However, major determinants of price are - Costs, competition and demand. Based on this there are three major approaches to setting the price of a product. They are:
1. Cost oriented pricing
2. Competition oriented pricing
3. Demand oriented pricing
Cost oriented pricing
In Cost oriented approach to pricing or cost based pricing the selling price of a product is determined by adding a percentage of profit to the product cost. There are two methods in cost oriented pricing. They are
1. Cost plus pricing and
2. Target profit pricing or break-even analysis.
Cost plus Pricing
Selling price of a product is calculated by aggregating all the costs of the product such as manufacturing cost, marketing cost and distribution cost plus a predetermined margin of profit. Giving below an example of cost plus pricing:
Particulars Amount $
Manufacturing Cost 60
Administration cost 6
Distribution Cost 6
Promotional and selling cost 8
Total Costs 80
Profit margin 10
Selling price 90
In this method the product cost include fixed and variable costs. It can be represented as follows:
Selling price = Variable Costs + Overhead Costs (Fixed Cost) + Profit.
Changes in the cost while changing the volume of production also needs to be taken into consideration before fixing the selling price. This method will help the manufacturer to secure his position in the market without any loss to the business. This method protect the interests of both the seller as well as the buyer and can be justifiable. The rate of profit margin vary from industry to industry and seller to seller. This method is useful when pricing the government contracts, where pricing of a contract needs to be estimated in advance. It can reduce the risk and