Selecting a Pricing Method
Selecting a Pricing Method 3 major considerations in price setting : costs of production, distribution, communication set a floor to the price competitors’ prices and the price of substitutes provide an orienting point customers’ assessment of unique features establishes the price ceiling (plafond)
Companies select a pricing method that includes 1 or more of these three considerations.
We will examine 6 price-setting methods: Mark-up pricing, target-return pricing, perceived-value pricing, value pricing, going-rate pricing and auction-type pricing Mark-up pricing (ajout de marge sur coûts de production): Add a standard mark-up to the product’s costs.
Unit cost = Variable cost + fixed cost / unit sales
Mark-up price = unit cost/ (1- desired return on sales)
Mark-ups are generally higher on seasonal items (to cover the risk of not selling), speciality items, slower-moving items, items with high storage (stockage) and handling (manipulation) costs, and demand-inelastic items, such as prescription drugs.
This method works only if the marked-up price actually brings in the expected level of sales. Target-return pricing (objectif de rendement):
The firm determines the price that would yield (rapporter) its target rate of return on investment. General Motors has priced its automobiles to achieve a 15-20% of return on investment (ROI). Public utilities need to make a fair ROI use this method.
Target-return price = unit cost + ((desired return * invested capital) / units sales)
But what would happen if sales don’t reach the expected unit sales? We have to determine the break-even point: fixed cost / (price- variable cost). The expected sales depend on price elasticity and competitors’ prices. Unfortunately, target-return pricing ignore these considerations above. Perceived-value pricing (valeur perçue):
An increasing number of companies now base their price on customer’s perceived value. Companies must deliver the
Companies select a pricing method that includes 1 or more of these three considerations.
We will examine 6 price-setting methods: Mark-up pricing, target-return pricing, perceived-value pricing, value pricing, going-rate pricing and auction-type pricing Mark-up pricing (ajout de marge sur coûts de production): Add a standard mark-up to the product’s costs.
Unit cost = Variable cost + fixed cost / unit sales
Mark-up price = unit cost/ (1- desired return on sales)
Mark-ups are generally higher on seasonal items (to cover the risk of not selling), speciality items, slower-moving items, items with high storage (stockage) and handling (manipulation) costs, and demand-inelastic items, such as prescription drugs.
This method works only if the marked-up price actually brings in the expected level of sales. Target-return pricing (objectif de rendement):
The firm determines the price that would yield (rapporter) its target rate of return on investment. General Motors has priced its automobiles to achieve a 15-20% of return on investment (ROI). Public utilities need to make a fair ROI use this method.
Target-return price = unit cost + ((desired return * invested capital) / units sales)
But what would happen if sales don’t reach the expected unit sales? We have to determine the break-even point: fixed cost / (price- variable cost). The expected sales depend on price elasticity and competitors’ prices. Unfortunately, target-return pricing ignore these considerations above. Perceived-value pricing (valeur perçue):
An increasing number of companies now base their price on customer’s perceived value. Companies must deliver the