Selling price setting method

Selling price setting method. Broadly speaking, pricing methods can be grouped into four main categories, namely demand-based, cost-based, profit-based, and competition-based pricing methods.

1. Demand-Based Pricing Method

Is a method that emphasizes the factors that influence customer tastes and preferences rather than factors such as costs, profits, and competition. Customer requests are based on various considerations, including:

  • The ability of customers to buy (purchasing power).
  • Willingness of customers to buy.
  • The position of a product in the customer’s lifestyle, namely regarding whether the product is a status symbol or just a product that is used daily.
  • The benefits that the product provides to the customer.
  • Prices of substitute products.
  • Potential market for the product.
  • The nature of non-price competition.
  • General consumer behavior.
  • Segments in the market.

There are at least seven pricing methods included in the demand-based pricing method, namely:

a. Skimming Pricing

This strategy is implemented by setting a high price for a new product or innovation in the introduction stage, then lowering the price when competition is getting tougher.

This strategy can only work well if consumers are not sensitive to price, but emphasize considerations of quality, innovation, and the product’s ability to satisfy needs.

b. Penetration Pricing

In this strategy, the company tries to introduce a new product at a low price in the hope that it will be able to obtain large sales volumes in a relatively short time.

The goal of this strategy is to achieve economies of scale and reduce unit costs. At the same time, the penetration strategy can also reduce the interest and ability of competitors because low prices cause the margins earned by each company to be limited. 

c. Prestige Pricing

Is a strategy to set a high price level so that consumers who are very concerned about the status will be attracted by the product, and then buy it.

Meanwhile, if the price is lowered to a certain level, then the demand for the goods or services will decrease. Products that are often associated with prestige pricing include gems, diamonds, luxury cars, and so on.

d. Price Lining

More used at retail level. Here, the seller determines several price levels on all the goods sold. For example: a store that sells various kinds of shoes with different models, sizes and qualities, determines 3 price levels, namely Rp. 30,000, Rp. 50,000, and Rp. 100,000,.

This will make it easier for consumers to make decisions to buy at prices that suit their financial capabilities.

e. Old-Even Pricing

This pricing method is often used for selling goods at the retail level. In this method, prices are set at odd numbers or prices that are close to a certain even number. For example, the price of Rp. 2,975 for a certain group of consumers who still think that the price is still in the Rp. 2,000 price range.

f. Demand-Backward Pricing

Is a price setting that goes through a backwards process, meaning the company estimates a price level that consumers are willing to pay, then the company determines the margin to be paid to wholesalers and retailers. After that, the selling price can be determined.

g. Bundle Pricing

Is a marketing strategy of two or more products in one package price. This method is based on the view that consumers value the value of a particular package as a whole more than the value of each item individually.

For example, travel agencies offer holiday packages that include transportation, accommodation and consumption. This method provides great benefits for buyers and sellers. Buyers can save on total costs, while sellers can reduce marketing costs.

Selling price setting method (foto/special)
Selling price setting method (foto/special)

2. Cost-Based Pricing.

In this method the main price determining factor is the supply or cost aspect, not the demand aspect. Prices are determined based on production and marketing costs plus a certain amount so as to cover direct costs, overhead costs and profits. The cost-based pricing method consists of:

a. Standard Markup Pricing

Pricing is determined by adding a certain percentage (markup) of the cost of all items in a product class. The markup percentage varies depending on the type of product being sold.

Usually products with a high turnover rate are subject to a smaller markup than products with a low turnover rate.

b. Cost Plus Percentage of Cost Pricing

Pricing is determined by adding a certain percentage to production or construction costs. This method is often used to determine the price of one item or only a few items.

For example, an architectural firm sets a rate of 15% of the construction cost of a house. So, if the construction cost of a house is Rp. 100 million and the architect’s fee is 15% of the construction cost (Rp. 15 million), then the final price is Rp. 115 million.

c. Cost Plus Fixed Fee Pricing

This method is widely applied in highly technical products, such as cars, airplanes or satellites. In this strategy, suppliers or producers will be compensated for all costs incurred, no matter how big.

But the producer or supplier only gets a certain fee as profit, the amount of which depends on the final project cost that is mutually agreed upon.

3. Profit-Based Pricing Method

Selling price setting method. This method seeks to balance revenues and costs in pricing. This effort can be made on the basis of specific profit volume targets or expressed in the form of a percentage of sales or investment.

This profit-based pricing method consists of target profit pricing, target return on sales pricing, and target return on investment pricing.

4. Competition-Based Pricing

Apart from being based on cost, demand or profit considerations, prices can also be set on the basis of competition, i.e. what competitors are doing. Competition-based pricing methods consist of customary pricing; above, at, or below market pricing; loss leader pricing; and sealed bid pricing.

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