Alternatives to Cost-Based Pricing
Posted: Sun Dec 22, 2024 9:02 am
In economic literature, one can find many different approaches to cost formation, which, for the most part, have similar calculation principles and basic indicators, differing only in names.
Alternatives to Cost-Based Pricing
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In practice, the most common are the cost, value indonesia email database and econometric methods. But with the development of market relations, it became necessary to modify this list. Now, pricing methods can be ranked as follows:
Customer-centric pricing focuses on the value of the product to the customer and reflects the current market conditions.
Cost-based pricing is based on the calculation of the seller's costs of producing and selling the product.
Parametric (normative). In this case, the cost method of pricing is the ratio of the price to a certain parameter characterizing the value of the product or its components.
A price setting mechanism that is based on the direct indication of a certain level or range of prices by authorized government bodies is an administrative approach.
Within each category of methods, options are identified depending on the method of accounting and separating costs, economic value, customer demand, and competitive advantages.
All these methods are, to varying degrees, oriented towards the economic functioning of the participants in determining the cost on the one hand, and towards calculating the seller’s expenses and the buyer’s needs for quality characteristics and the usefulness of the goods on the other.
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Pricing Strategies
Methods for determining the cost do not just appear, they are developed gradually, using experience and knowledge. There are many pricing strategies, each of which deserves special attention. We will briefly consider several of the most common methods:
"Penetration"
This approach involves setting the price of the product significantly lower than that of competitors. A gradual increase in cost is possible. The method is ideal for products that have just appeared on the market and do not have special characteristics that distinguish them from the crowd.
"Penetration"
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The strategy of attracting new customers and increasing sales volumes can provide the company with significant benefits. However, it is important to remember the possible risk of reducing the quality of the product and deteriorating the reputation.
Skimming Strategy
Consists of setting a higher price for a product than the market expects, allowing for a faster recoupment of research and production costs. It is important to realize that the effectiveness of this tactic will be questionable if there is a competitor who is able to further reduce prices.
Often this tactic is aimed at high-income customers or those who want to stay up to date with the latest trends. It is applicable to a new product with high value: it is new to the market and is not yet known to consumers or has no competitors.
Skimming Strategy
Source: shutterstock.com
With a high pricing policy, sales may fall, so the strategy should be used carefully, over a short period of time and only if the company is confident in its abilities.
Market activity
A unique tactic for those who seek to control price fluctuations. It is dynamic - the cost of products is constantly changing. Steps are taken to expand the geography of sales. It is especially effective during periods of economic volatility, since it solves not only the problem of maintaining one's position in the market and current sales volumes.
Individual approach to pricing
When unique rates are set for different consumer groups on the same product. Or these are special discounts and promotions for certain clients. The tactics stimulate the growth of sales volumes of a specific product or service, and help attract consumers.
"Elite product"
Successful implementation of this approach requires a simultaneous increase in value and sophistication of the product. The exponential growth of development and manufacturing costs must be slowed down, while the cost of the product increases. Increased value must be correlated with improved quality.
Download a useful document on the topic:
Checklist: How to Achieve Your Goals in Negotiatio
Alternatives to Cost-Based Pricing
Source: shutterstock.com
In practice, the most common are the cost, value indonesia email database and econometric methods. But with the development of market relations, it became necessary to modify this list. Now, pricing methods can be ranked as follows:
Customer-centric pricing focuses on the value of the product to the customer and reflects the current market conditions.
Cost-based pricing is based on the calculation of the seller's costs of producing and selling the product.
Parametric (normative). In this case, the cost method of pricing is the ratio of the price to a certain parameter characterizing the value of the product or its components.
A price setting mechanism that is based on the direct indication of a certain level or range of prices by authorized government bodies is an administrative approach.
Within each category of methods, options are identified depending on the method of accounting and separating costs, economic value, customer demand, and competitive advantages.
All these methods are, to varying degrees, oriented towards the economic functioning of the participants in determining the cost on the one hand, and towards calculating the seller’s expenses and the buyer’s needs for quality characteristics and the usefulness of the goods on the other.
Read also!
"Marketing Department KPI: 11 indicators and calculation example"
Read more
Pricing Strategies
Methods for determining the cost do not just appear, they are developed gradually, using experience and knowledge. There are many pricing strategies, each of which deserves special attention. We will briefly consider several of the most common methods:
"Penetration"
This approach involves setting the price of the product significantly lower than that of competitors. A gradual increase in cost is possible. The method is ideal for products that have just appeared on the market and do not have special characteristics that distinguish them from the crowd.
"Penetration"
Source: shutterstock.com
The strategy of attracting new customers and increasing sales volumes can provide the company with significant benefits. However, it is important to remember the possible risk of reducing the quality of the product and deteriorating the reputation.
Skimming Strategy
Consists of setting a higher price for a product than the market expects, allowing for a faster recoupment of research and production costs. It is important to realize that the effectiveness of this tactic will be questionable if there is a competitor who is able to further reduce prices.
Often this tactic is aimed at high-income customers or those who want to stay up to date with the latest trends. It is applicable to a new product with high value: it is new to the market and is not yet known to consumers or has no competitors.
Skimming Strategy
Source: shutterstock.com
With a high pricing policy, sales may fall, so the strategy should be used carefully, over a short period of time and only if the company is confident in its abilities.
Market activity
A unique tactic for those who seek to control price fluctuations. It is dynamic - the cost of products is constantly changing. Steps are taken to expand the geography of sales. It is especially effective during periods of economic volatility, since it solves not only the problem of maintaining one's position in the market and current sales volumes.
Individual approach to pricing
When unique rates are set for different consumer groups on the same product. Or these are special discounts and promotions for certain clients. The tactics stimulate the growth of sales volumes of a specific product or service, and help attract consumers.
"Elite product"
Successful implementation of this approach requires a simultaneous increase in value and sophistication of the product. The exponential growth of development and manufacturing costs must be slowed down, while the cost of the product increases. Increased value must be correlated with improved quality.
Download a useful document on the topic:
Checklist: How to Achieve Your Goals in Negotiatio