Some Pricing Methods / Techniques

These are the traditional methods of product pricing.

1. Cost Plus Pricing
2. Mark-up Pricing
3. Going Rate Method
4. Target Return Pricing
5. Sealed Bid Pricing Method

1. Cost Plus Pricing:
   Cost-plus pricing is one of the simplest ways of price determination. A certain percentage of cost is added as a profit margin to the value of the product to acquire the selling price.
2. Mark-up Pricing:
   It is a form of cost-plus pricing, but here the profit margin is presented as a percentage of expected return on sales. The formula for mark-up pricing is:
   

   Mark-up Price

   =

   Unit Cost(Fixed + Variable)/1-Percentage of Expected Return on Sales

   Example: If the unit cost of manufacturing a bag is Rs 100 and the expected return on sales is 25%, determine the mark-up price.
   Mark-up Price = Unit Cost (Fixed+Variable)/(1-Percentage of Expected Return on Sales)
   Mark-up Price = 100/1-25%
   Mark-up Price = Rs 133.33
3. Going Rate Method:
   'Follow the crowd' method is based on market competition, where the company price its product similar to the competitor's product price. If the market leader reduces the price of its product, the organization also needs to decrease its product price, even if the latter’s cost of production is high.
4. Target Return Pricing:
   The pricing objective in target return method is to attain a certain level of ROI (Return on Investment).
   The formula for determining the target return price is:
   

   Target Return Price

   =

   Total Cost + Desired Return on Investment / Total Sales in Units

   The Formula to find out the desired return on investment:
   

   Desired Return on Investment

   =

   Desired%ROI * Total Investment Value

   Example: If the total business investment is Rs 80000, the desired ROI is 25%; the total cost incurred is Rs 30000 and the expected sales are 5000 units, determine the target return price.
   Desired Return on Investment = 25% * 80000
   Desired Return on Investment = Rs 20000
   Target Return Price = (30000+20000)/5000
   Target Return Price = Rs 10
5. Sealed Bid Pricing Method:
   When it comes to industrial marketing or government projects, the supplier needs to bid specific product price, which he/she assumes to be the lowest, in a sealed quotation.
   In other words, the organization needs to fill a tender, which indicates its costing and competitiveness. The pricing should be done smartly by estimating the profit margin at different price levels and enclosing the most competitive price.