Pricing & Market: Theory of pricing-cost plus pricing, Target pricing, marginal cost pricing, Going rate pricing

  1. Cost-Plus Pricing:

Cost-plus pricing, also known as markup pricing, is a pricing strategy where a fixed percentage markup or profit margin is added to the cost of producing or acquiring a product to determine its selling price. The formula for cost-plus pricing is:

Selling Price = Cost of Production + (Cost of Production × Markup Percentage)

This approach ensures that the seller covers both the cost of production and desired profit margin. It is commonly used in industries where costs are relatively stable, and the focus is on ensuring a predictable profit.

  1. Target Pricing:

Target pricing is a customer-driven pricing strategy where the selling price is set based on what the target market is willing to pay for a product. It involves conducting market research to understand customer preferences, perceived value, and price sensitivity.

The process involves the following steps:

  • Identify the target market and assess their willingness to pay.
  • Determine the product’s features and attributes that customers value the most.
  • Calculate the target cost by subtracting the desired profit margin from the target selling price.
  • Design the product to meet the target cost without compromising quality.
  1. Marginal Cost Pricing:

Marginal cost pricing is a pricing strategy where the selling price of a product is set equal to its marginal cost of production. In perfect competition, firms will set their prices at the level of marginal cost to maximize efficiency and minimize deadweight loss.

The formula for marginal cost pricing is:

Selling Price = Marginal Cost of Production

This strategy is relevant in markets where there is fierce competition and firms have little market power.

  1. Going Rate Pricing:

Going rate pricing, also known as competitive pricing or follow-the-leader pricing, is a pricing strategy where a firm sets its prices based on the prevailing market price or the price set by its competitors. The idea is to match or closely follow the prices charged by competitors to avoid losing market share.

This strategy is commonly used in industries where products are homogeneous, and price is a significant factor in the purchasing decision. It is less about cost consideration and more about staying competitive in the market.

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