Last Updated : 23 May, 2024

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Pricing is the ** process of evaluating the value or cost that will be charged for a product or service**. It is one of the 4Ps of marketing; i.e.,

**. Price is the only revenue-generating element. Pricing**

**Place, Promotion, Price, and Product****. Pricing**

**involves the activities and procedures that help in deciding the value, a company is going to charge in exchange for its product/service****Methods are the methods that help in determining the price of goods/services based on various factors.**

Table of Content

- Types of Pricing Methods
- I. Cost-Oriented Pricing Methods
- 1. Cost-Plus Pricing
- 2. Markup Pricing
- 3. Target Return Pricing
- II. Market-Oriented Pricing Methods
- 1. Perceived Value Pricing
- 2. Value Pricing
- 3. Going Rate Pricing
- 4. Differential Pricing
- 5. Auction Type Pricing
- Types of Pricing Methods-FAQs

## Types of Pricing Methods

The pricing methods are broadly classified into two categories: ** Cost-Oriented Pricing Methods **and

**The**

**Market-Oriented Pricing Methods.****. However, the**

**Cost-Oriented Pricing Methods include Cost-Plus Pricing, Markup Pricing, and Target Return Pricing****.**

**Market-Oriented Pricing Methods include Perceived Value Pricing, Value Pricing, Going Rate Pricing, Differential Pricing, and Auction Type Pricing**### I. Cost-Oriented Pricing Methods

#### 1. Cost-Plus Pricing

Cost-plus Pricing is the easiest and most basic method of pricing. Under this method, the** seller adds a pre-specified percentage on the cost of producing one unit**. This pre-specified percentage, also known as Markup Percentage, is used to determine the selling price. The

**cost of production. Cost-plus Pricing**

**markup; thus, is the profit percentage implied on the****. Price determination under cost-oriented pricing is calculated as follows:**

**ensures the desired rate of return**Total Cost = Fixed Costs + Variable Costs

See AlsoTypes of Pricing Strategies: Explained with Examples19 Most Common Pricing Strategies for Business in 2024 (with Examples) - FREE PDF DownloadHow to calculate Option Pricing using Monte Carlo Simulation in ExcelPricing methods: Different types and how to find the right one for your businessUnit cost =[Tex]\frac{Total~cost}{Number~of~units}[/Tex]

Markup Price = Unit cost x Markup Percentage

Selling Price = Unit cost + Markup Price

** For example,** Assume that the cost of production of product A is $1,000 with a markup of 50% on the total cost, then the selling price will be calculated as:

Markup Price = Unit cost x Markup Percentage = $1,000 x 50% = $500

Selling Price = Unit cost + Markup Price = $1,000 + $500

Selling Price = $1,500

#### 2. Markup Pricing

Markup Pricing is the method where ** markup is calculated on the **selling price

**. In other words, it is the**

**of the product****profit percentage**

**method of adding a****. Prices under markup pricing are considered as:**

**to the selling price of the product**Marked Price =[Tex]\frac{Unit~Cost}{1-Desired~return~on~sale}[/Tex]

** For example,** Assume that the cost of production of product and the seller wants to earn a profit of 20% on sales, then the markup price will be calculated as:

Marked-up Price =[Tex]\frac{Unit~Cost}{1-Desired~Return~on~Sale}[/Tex]

=[Tex]\frac{1000}{1-0.20}[/Tex]

Marked-up Price = $1,250

#### 3. Target Return Pricing

Target Return Pricing is the ** method under which the firm decides to set up the prices of products according to the pre-specified required rate of **Return on Investment (ROI).

Target Return Price =[Tex]Unit~Cost+\frac{Desired~Return\times{Capital~Invested}}{Unit~Sales}[/Tex]

** For example,** Assume that the manufacturer has invested $10,000 in business and is expecting an ROI of 20% i.e., $2,000, given that the unit price is $50 and the target sales is 100 units, then the target return price is given by

Target Return Price =[Tex]Unit~Cost+\frac{Desired~Return\times{Capital~Invested}}{Unit~Sales}[/Tex]

= 50+\frac{0.20\times{10,000}}{100}

Target Return Price = $70

### II. Market-Oriented Pricing Methods

#### 1. Perceived Value Pricing

Under this pricing method, the ** manufacturer undertakes the customers’ perception of goods and services**.

**The customer’s expectation of the price of the product plays an important role in deciding the price of the product.**

**For Example,**

- Starbucks charges high prices for its coffee as compared to other coffee brands, relying on the
.**perception of a unique coffee experience and ambience** , leveraging the perception of healthier and more sustainable options.**Organic food products are often priced higher than non-organic food products**

#### 2. Value Pricing

Under this method of pricing, re-engineering** is done to reduce the cost of production as well as maintain the high-end quality**. The

**.**

**cost of product/services are thus low with better quality****For example,**

- Walmart is known for its value pricing strategy, offering a wide range of
than many of its competitors. This attracts**products at lower prices**consumers**budget-conscious**.**who prioritise affordability** - McDonald’s offers a
,**value-priced menu with items prices at low prices**.**catering to customers looking for affordable meal options**

#### 3. Going Rate Pricing

Under this method of pricing, the ** firm undertakes the prices of **rival firms

**. Generally, to end the price wars among the firms, the prices of all firms in an industry remain more or less the same when**

**and sets its prices accordingly****. Oligopolistic firms like steel, fertilizers, paper, etc., practice going rate pricing.**

**they adopt the going-rate pricing method****For example,**

- Telecommunication firms like
under the going rate pricing method.**Jio, Airtel, and Vodaphone charge almost the same rates** - Ride-sharing companies like Uber and Lyft use dynamic pricing, adjusting fares based on factors like demand and supply.

#### 4. Differential Pricing

Differential Pricing is ** practiced under price discrimination where the sellers charge different prices from different buyers.** The prices can also vary from age, gender, location, customer standard, etc.

**For example,**

- The price of
**Mineral Water charged is different in different places, hotels, restaurants, general stores, etc.** based on factors like age, time of the day, and special occasions.**Movie Theaters often use differential pricing**

#### 5. Auction Type Pricing

This type of pricing method** came into existence with the increased usage of the internet**. Websites like

**. There are three types of auctions:**

**OLX, Quikr, eBay, etc., practice auction-type pricing**English Auctions consist of**English Auctions:**. The sellers**one seller and multiple buyers**bid.**tend to increase the price until the product reaches the best**Under Dutch Auctions, there may be**Dutch Auctions:**. The**one seller and many buyers or many sellers and one buyer**according to the capacity of bidders and the**former type consists of setting up the best price and adjusting it**.**latter type undertakes the bidder asking for the product and multiple sellers offering reasonable prices**Government and industrial purchases generally follow this method of pricing. Under this, potential buyers communicate their prices with suppliers only and do not disclose them to anyone else.**Sealed-Bid Auctions:**

## Types of Pricing Methods – FAQs

### What is Pricing?

Pricing is the process of evaluating the value or cost that will be charged for a product or service.

### How many categories of pricing methods are there?

Pricing Methods are divided in mainly two categories: Cost-Oriented Pricing Methods and Market-Oriented Pricing Methods.

### How many types of pricing in Cost-Oriented Pricing Method?

In Cost-Oriented Pricing Method there are three types of pricing such as, Cost-Plus Pricing, Markup Pricing, Target Return Pricing.

### What are different types of pricing in Market-Oriented Pricing Method?

Different types of pricing in Market-Oriented Pricing Method are :Perceived Value Pricing, Value Pricing, Going Rate Pricing, Differential Pricing, and Auction Type Pricing.

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