Descriptive pricing appraoches

1. Descriptive Pricing Approaches

2. Full cost pricing
Full cost pricing is a practice where the price of a product is
calculated by a firm on the basis of its direct costs per unit of
output plus a markup to cover overhead costs and profits. The
overhead costs are generally calculated assuming less than full
capacity operation of a plant in order to allow for fluctuating
levels of production and costs.
Full cost pricing = Cost + Fair Profit
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3. Full-Cost Pricing
 markup pricing : fixed amount added to the total cost of
the product
 break-even pricing : per-unit fixed costs + per-unit
variable costs
 rate-of-return pricing : set to obtain a desired ROI
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4. Pricing Strategies
 full-cost price strategies – consider both variable and
fixed costs
 variable-cost price strategies – consider only variable
costs, not total costs
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5. Product-Line Pricing
 Product-Line Pricing involves determining:
1) the lowest-priced product and price
2) the highest-priced product and price, and
3) price differentials for all other products in the line
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6. Product life cycle pricing
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7. Use Skimming Pricing Strategy when:
 demand likely to be price inelastic
 different price-market segments, appealing to buyers with a
higher acceptable price
 offering is unique enough to be protected from competition
 production or marketing costs are unknown
 capacity constraint exists
 organization wants to generate funds quickly

realistic perceived value of the product exists
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8. Use Penetration Pricing Strategy when:

demand likely to be price elastic

offering is not unique enough to be protected from
competition
 competitors expected to enter market quickly

no distinct price-market segments

possibility of cost savings with large volume of sales

organization’s major objective is to obtain a large
market share
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9. Loss leader pricing strategy
A product priced below cost, or at a loss, in order to attract new
customers is called a loss leader. Loss-leader pricing the sale of
certain products at, or close to, a loss while pricing related
products or services high to increase profits. One popular
example of this is a razor with disposable blades. Often, a store
will price the razor very low, but armed with the knowledge that
the consumers with need to purchase new blades, refill sets are
over-priced to increase profits.
Loss leaders make up for the losses they incur by enticing
consumers to make further purchases of profitable goods while
they are in the shop. Since many customers browse and end up
purchasing more than they had initially planned, this is a smart
strategy. Customers also feel good about getting a bargain, and
will often buy other items with the money they just saved.
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10. Peak load pricing strategy
Peak-load pricing strategy involves charging different prices
during peak hours versus off peak hours. When the demand
during peak times is so high that the capacity of the firm cannot
serve all customers at the same price, the profitable thing for the
firm to do is engage in peak-load pricing
Thus, higher prices can be charged during high peak demand
hours, and lower prices charged during off peak demand hours.
If a firm were to charge a high price at all times, no one would
purchase during low peak hours. By lowering the price during
these low peak demand times, and charging a higher price
during high peak demand times, the firm increases profits by
selling to some consumers during the low peak times than none
at all. In turn, if a firm charged a low price during all times of the
day, it would lose profit during high peak demand times when
consumers are willing to pay extra for the services.
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