L9

Question 1

How to conduct cost based pricing? (3 methods)

Answer 1

The most common form
Simple logic: The selling price should be greater than what it costs to produce or acquire that item.

3 Methods:

1) Cost-plus pricing
Is the simplest form of Cost-Based Pricing
Must determine the amount to be added to an item’s cost, and then add that amount to arrive at the item’s price:
P = C + added amount
Is particularly common among companies that sell customized products

2) Markup pricing
Is used when it is difficult to determine the added amount due to large numbers of different products
Is common among wholesalers and retailers
The item’s cost is “marked up” by some standard percentage of that cost.
P = C + added amount
M = (added amount / C) x 100

Based on tradition or rules of thumb

• Wholesaling: 20%
• Retailing: keystone pricing or doubling the item’s cost (100%)
• Restaurants: tripling the food costs (200%) and quadrupling the costs of served alcoholic beverages (300%)

3) Gross-margin pricing
The amount of a company’s sales revenue that remains after subtracting the costs of the items sold
Is more difficult to use than markup pricing.
%GM = (added amount / P) x 100

Question 2

How to conduct competitor based pricing and what are the pros and cons?

Answer 2

Is the setting of an item’s initial price by examination of competitors’ prices
Parity pricing: matching the item’s price to the level of a competitor’s price
Can be challenging due to the number of competitors, including those online

+ Intuitive
+ Relatively easy to carry out

• Not useful in efforts to maximize total profits
• Lack of price-setting rationale if all competitors are using this method

Question 3

How to conduct customer based pricing?

What are the

Answer 3

The initial price is set by considering the customer’s needs and the ability of the seller’s product to satisfy those needs.
This method makes possible a rational basis for price setting – how much of the product’s value can be captured by its price.

Question 4

Pros and cons for cost-based pricing?

Answer 4

+ Simple to use
+ Standard markup or margin levels reduces the need for research on competitor’s prices

• Not useful in efforts to maximize total profits

Question 5

Name 3 reasons Why Customer-Based Pricing is a Less Common Method.

Answer 5

1) Certain industries or certain conditions use cost-based methods as a matter of practice, particularly when costs are high.
2) Customer-based pricing requires research on customer needs rather than on costs or competitive price information (seemingly less extensive).
3) Lack of interest by the price-setter

Question 6

Where is the potential of Customer-Based Pricing?

Answer 6

Capture a larger amount of a product’s value
Communicate the product’s value over that of the competitor’s products
Avoid parity pricing
Guide product development
Determine different customer values for different market segments