Pricing is the process of determining what a company will receive in exchange for its

products. Pricing factors are manufacturing cost, market place, competition, market
condition, and quality of product. Pricing is also a key variable in microeconomic price
allocation theory. Pricing is a fundamental aspect of financial modeling and is one of the
four Ps of the marketing mix. The other three aspects are product, promotion, and place.
Price is the only revenue generating element amongst the four Ps, the rest being cost
centers.

Pricing is the manual or automatic process of applying prices to purchase and sales
orders, based on factors such as: a fixed amount, quantity break, promotion or sales
campaign, specific vendor quote, price prevailing on entry, shipment or invoice date,
combination of multiple orders or lines, and many others. Automated systems require
more setup and maintenance but may prevent pricing errors. The needs of the consumer
can be converted into demand only if the consumer has the willingness and capacity to
buy the product. Thus pricing is very important in marketing.

Price lining is the use of a limited number of prices for all product offerings of a vendor.
This is a tradition started in the old five and dime stores in which everything cost either 5
or 10 cents. Its underlying rationale is that these amounts are seen as suitable price points
for a whole range of products by prospective customers. It has the advantage of ease of
administering, but the disadvantage of inflexibility, particularly in times of inflation or
unstable prices.

A loss leader is a product that has a price set below the operating margin. This results in a
loss to the enterprise on that particular item in the hope that it will draw customers into
the store and that some of those customers will buy other, higher margin items.

Promotional pricing refers to an instance where pricing is the key element of the
marketing mix.

The price/quality relationship refers to the perception by most consumers that a relatively
high price is a sign of good quality. The belief in this relationship is most important with
complex products that are hard to test, and experiential products that cannot be tested
until used (such as most services). The greater the uncertainty surrounding a product, the
more consumers depend on the price/quality hypothesis and the greater premium they are
prepared to pay. The classic example is the pricing of Twinkies, a snack cake which was
viewed as low quality after the price was lowered. Excessive reliance on the
price/quantity relationship by consumers may lead to an increase in prices on all products
and services, even those of low quality, which causes the price/quality relationship to no
longer apply.[citation needed]

Premium pricing (also called prestige pricing) is the strategy of consistently pricing at, or
near, the high end of the possible price range to help attract status-conscious consumers.
Examples of companies which partake in premium pricing in the marketplace include
Rolex and Bentley. People will buy a premium priced product because:
 1. They believe the high price is an indication of good quality;
2. They believe it to be a sign of self worth - "They are worth it;" it authenticates the
buyer's success and status; it is a signal to others that the owner is a member of an
exclusive group;
3. They require flawless performance in this application - The cost of product
malfunction is too high to buy anything but the best - example : heart pacemaker.

The term Goldilocks pricing is commonly used to describe the practice of providing a
"gold-plated" version of a product at a premium price in order to make the next-lower
priced option look more reasonably priced; for example, encouraging customers to see
business-class airline seats as good value for money by offering an even higher priced
first-class option.[citation needed] Similarly, third-class railway carriages in Victorian England
are said to have been built without windows, not so much to punish third-class customers
(for which there was no economic incentive), as to motivate those who could afford
second-class seats to pay for them instead of taking the cheaper option.[citation needed] This is
also known as a potential result of price discrimination. The name derives from the
Goldilocks story in which Goldilocks chose neither the hottest nor the coldest porridge,
but instead the one that was "just right". More technically, this form of pricing exploits
the general cognitive bias of aversion to extremes. This practice is known academically
as "framing". By providing three options (i.e. small, medium, and large; first, business,
and coach classes) you can manipulate the consumer into choosing the middle choice and
thus, the middle choice should yield the most profit to the seller, since it is the one chosen
most often.

Demand-based pricing is any pricing method that uses consumer demand - based on
perceived value - as the central element. These include: price skimming, price
discrimination and yield management, price points, psychological pricing, bundle pricing,
penetration pricing, price lining, value-based pricing, geo and premium pricing. Pricing
factors are manufacturing cost, market place, competition, market condition, quality of
product.

Multidimensional pricing is the pricing of a product or service using multiple numbers. In

this practice, price no longer consists of a single monetary amount (e.g., sticker price of a
car), but rather consists of various dimensions (e.g., monthly payments, number of
payments, and a downpayment). Research has shown that this practice can significantly
influence consumers' ability to understand and process price information [1]

PRICING STARTEGIES

Competition-based pricing
Setting the price based upon prices of the similar competitor products.

Competitive pricing is based on three types of competitive product:

Products have lasting distinctiveness from competitor's product. Here we can assume
 o The product has low price elasticity.
o The product has low cross elasticity.
o The demand of the product will rise.
 Products have perishable distinctiveness from competitor's product, assuming the
product features are medium distinctiveness.

Products have little distinctiveness from competitor's product. assuming that:

o The product has high price elasticity.

o The product has some cross elasticity.

o No expectation that demand of the product will rise.

Cost-plus pricing
Cost-plus pricing is the simplest pricing method. The firm calculates the cost of
producing the product and adds on a percentage (profit) to that price to give the selling
price. This method although simple has two flaws; it takes no account of demand and
there is no way of determining if potential customers will purchase the product at the
calculated price.

This appears in 2 forms, Full cost pricing which takes into consideration both variable
and fixed costs and adds a % markup. The other is Direct cost pricing which is variable
costs plus a % markup, the latter is only used in periods of high competition as this
method usually leads to a loss in the long run.

Creaming or skimming
Selling a product at a high price, sacrificing high sales to gain a high profit, therefore
‘skimming’ the market. Usually employed to reimburse the cost of investment of the
original research into the product – commonly used in electronic markets when a new
range, such as DVD players, are firstly dispatched into the market at a high price. This
strategy is often used to target "early adopters" of a product or service. These early
adopters are relatively less price-sensitive because either their need for the product is
more than others or they understand the value of the product better than others. This
strategy is employed only for a limited duration to recover most of investment made to
build the product. To gain further market share, a seller must use other pricing tactics
such as economy or penetration. This method can come with some setbacks as it could
leave the product at a high price to competitors. [1]

Limit pricing
A limit price is the price set by a monopolist to discourage economic entry into a market,
and is illegal in many countries. The limit price is the price that the entrant would face
upon entering as long as the incumbent firm did not decrease output. The limit price is
often lower than the average cost of production or just low enough to make entering not
profitable. The quantity produced by the incumbent firm to act as a deterrent to entry is
usually larger than would be optimal for a monopolist, but might still produce higher
economic profits than would be earned under perfect competition. The problem with limit
pricing as strategic behavior is that once the entrant has entered the market, the quantity
used as a threat to deter entry is no longer the incumbent firm's best response. This means
that for limit pricing to be an effective deterrent to entry, the threat must in some way be
made credible. A way to achieve this is for the incumbent firm to constrain itself to
produce a certain quantity whether entry occurs or not. An example of this would be if
the firm signed a union contract to employ a certain (high) level of labor for a long period
of time.

Penetration pricing
The price is deliberately set at low level to gain customer's interest and establishing a
foot-hold in the market.[2]

Price discrimination
Setting a different price for the same product in different segments to the market. For
example, this can be for different ages or for different opening times, such as cinema
tickets.

Premium pricing
Premium pricing is the practice of keeping the price of a product or service artificially
high in order to encourage favorable perceptions among buyers, based solely on the price.
The practice is intended to exploit the (not necessarily justifiable) tendency for buyers to
assume that expensive items enjoy an exceptional reputation or represent exceptional
quality and distinction.

Predatory pricing
Aggressive pricing intended to drive out competitors from a market. It is illegal in some
places.

Contribution margin-based pricing

Contribution margin-based pricing maximizes the profit derived from an individual
product, based on the difference between the product's price and variable costs (the
product's contribution margin per unit), and on one’s assumptions regarding the
relationship between the product’s price and the number of units that can be sold at that
price. The product's contribution to total firm profit (i.e., to operating income) is
maximized when a price is chosen that maximizes the following: (contribution margin
per unit) X (number of units sold).

Psychological pricing
Pricing designed to have a positive psychological impact. For example, selling a product
at $3.95 or $3.99, rather than $4.

Dynamic pricing
A flexible pricing mechanism made possible by advances in information technology, and
employed mostly by Internet based companies. By responding to market fluctuations or
large amounts of data gathered from customers - ranging from where they live to what
they buy to how much they have spent on past purchases - dynamic pricing allows online
companies to adjust the prices of identical goods to correspond to a customer’s
willingness to pay. The airline industry is often cited as a dynamic pricing success story.
In fact, it employs the technique so artfully that most of the passengers on any given
airplane have paid different ticket prices for the same flight.

Price leadership
An observation made of oligopic business behavior in which one company, usually the
dominant competitor among several, leads the way in determining prices, the others soon
following.

Target pricing
Pricing method whereby the selling price of a product is calculated to produce a
particular rate of return on investment for a specific volume of production. The target
pricing method is used most often by public utilities, like electric and gas companies, and
companies whose capital investment is high, like automobile manufacturers.

Target pricing is not useful for companies whose capital investment is low because,
according to this formula, the selling price will be understated. Also the target pricing
method is not keyed to the demand for the product, and if the entire volume is not sold, a
company might sustain an overall budgetary loss on the product.

Absorption pricing
Method of pricing in which all costs are recovered. The price of the product includes the
variable cost of each item plus a proportionate amount of the fixed costs. A form of cost
plus pricing
High-low pricing
Method of pricing for an organization where the goods or services offered by the
organization are regularly priced higher than competitors, but through promotions,
advertisements, and or coupons, lower prices are offered on key items. The lower
promotional prices are targeted to bring customers to the organization where the customer
is offered the promotional product as well as the regular higher priced products. [3]

Marginal-cost pricing
In business, the practice of setting the price of a product to equal the extra cost of
producing an extra unit of output. By this policy, a producer charges, for each product
unit sold, only the addition to total cost resulting from materials and direct labor.
Businesses often set prices close to marginal cost during periods of poor sales. If, for
example, an item has a marginal cost of $1.00 and a normal selling price is $2.00, the
firm selling the item might wish to lower the price to $1.10 if demand has waned. The
business would choose this approach because the incremental profit of 10 cents from the
transaction is better than no sale at all.