Cost Determinants of price – methods Markup pricing: Markup pricing is a pricing strategy that involves

adding a percentage of the cost of goods sold to the price of a product. The markup is typically a fixed
percentage that is added consistently to all products. For example, if the cost of producing a product is
$50 and the markup is 50%, the price of the product would be $75. This pricing strategy is commonly
used by retailers, wholesalers, and distributors. Keystoning: Keystoning is a pricing strategy where the
price of a product is doubled from its cost. For example, if the cost of producing a product is $50, the
price of the product would be $100. This pricing strategy is often used by retailers, especially in the
fashion and jewelry industries. Profit maximization pricing: Profit maximization pricing is a pricing
strategy that involves setting prices to maximize profits. This strategy considers both the cost of
producing a product and the demand for it. Companies using this strategy will typically set prices higher
than the cost of producing a product, but not so high that demand drops significantly. For example,
luxury car brands such as Rolls Royce use profit maximization pricing to charge premium prices for their
products. Break-even pricing: Break-even pricing is a pricing strategy that involves setting prices at a
level that covers the cost of producing and selling a product but does not generate a profit. The goal of
break-even pricing is to cover the fixed and variable costs of producing a product. For example, a
company that produces and sells handmade soap may use break-even pricing to cover their costs and
make a small profit. Target return pricing: Target return pricing is a pricing strategy that involves setting
prices to achieve a specific target return on investment (ROI). This strategy takes into account the cost of
producing a product, the company’s desired profit margin, and the expected demand for the product.
For example, a company that invests in a new product may use target return pricing to set a price that
will allow them to achieve a specific ROI. In summary, businesses use various pricing strategies
depending on their goals, costs, and target customers. These strategies can include markup pricing,
keystoning, profit maximization pricing, break-even pricing, and target return pricing. Other
Determinant of Price The price of a product is influenced by a variety of factors including the stage in the
product life cycle (PLC), competition, distribution strategy, promotion strategy, and perceived product
value. Here are some examples of how these factors can impact pricing decisions: Stage in PLC: The
stage of a product in its life cycle can impact pricing decisions. In the introduction stage, prices are often
set high to recoup development costs and create a perception of high value. For example, when Apple
introduced the iPhone in 2007, it priced the device at $599, which was considered expensive at the time.
In the growth stage, prices may be lowered to attract more customers and gain market share. In the
maturity stage, prices may be lowered even further to maintain market share and compete with other
products. In the decline stage, prices may be lowered to clear inventory or discontinued altogether.
Competition: Competitors can influence pricing decisions. In a highly competitive market, prices may be
lowered to gain market share or to match competitors’ prices. Conversely, if a company has a monopoly
on a product or service, it may be able to charge higher prices. For example, pharmaceutical companies
often have a monopoly on certain medications, which allows them to charge high prices. Distribution
strategy: The distribution strategy can impact pricing decisions. For example, if a company uses an
exclusive distribution strategy, it may be able to charge higher prices because the product is only
available in select locations. Conversely, if a company uses a wide distribution strategy, prices may be
lower because the product is widely available. Promotion strategy: The promotion strategy can impact
pricing decisions. For example, if a company uses a high-end advertising campaign, it may be able to
charge higher prices because the product is perceived as high-quality. Conversely, if a company uses a
low-cost promotion strategy, prices may be lower because the product is perceived as lower-quality.
Perceived product value: The perceived value of a product can impact pricing decisions. If a product is
perceived as high-quality or has unique features, it may be able to command a higher price. Conversely,
if a product is perceived as low-quality or lacking in features, prices may be lower. For example, luxury
brands such as Chanel are able to charge premium prices because their products are perceived as high-
quality and exclusive. In summary, pricing decisions are influenced by a variety of factors including the
stage in the product life cycle, competition, distribution strategy, promotion strategy, and perceived
product value. Understanding these factors and how they impact pricing can help businesses make
informed pricing decisions. Top of Form Various Pricing Strategies Penetration pricing: This strategy
involves setting a low price initially to gain market share and attract customers. An example of
penetration pricing in India is the Xiaomi smartphones. Xiaomi entered the Indian market with
aggressive pricing and undercutting its competitors’ prices, which helped the company gain a significant
market share. Price Skimming: price skimming is a pricing strategy where a business sets a high price for
a new product or service when it is first launched and then gradually reduces the price over time as
competition increases or demand levels off. This strategy is often used by businesses to capitalize on
early adopters who are willing to pay a premium price for a new and innovative product. An example of
price skimming in the Indian market is the launch of the iPhone X by Apple, where the company set a
high price initially and then gradually reduced it over time to attract a wider range of customers.
Premium pricing: This strategy involves setting a high price to create a perception of exclusivity, luxury,
and high quality. An example of premium pricing in India is the Taj Mahal Palace hotel in Mumbai. The
Taj Mahal Palace is known for its luxurious accommodations, personalized services, and exclusive
amenities, and it commands premium prices compared to other hotels in the area. Value-based pricing:
This strategy involves setting prices based on the perceived value that the product or service provides to
customers. An example of value-based pricing in India is Apple products. Apple is known for its high-
quality products, advanced technology, and user-friendly interfaces, and the company sets prices based
on the value that its products provide to customers. Bundle pricing: This strategy involves offering
several products or services together at a lower price than if they were purchased separately. An
example of bundle pricing in India is fast food chains such as McDonald’s and KFC offering meal deals
that include a burger, fries, and a drink at a lower price than if each item was purchased separately.
Dynamic pricing: This strategy involves adjusting prices based on changing market conditions, such as
supply and demand, seasonality, and competitor pricing. An example of dynamic pricing in India is ride-
hailing services such as Ola and Uber, which adjust prices based on demand and supply during peak
hours or in busy areas. Psychological pricing: This strategy involves setting prices that appeal to
customers’ emotions and perceptions. Examples of psychological pricing in India include setting prices
that end in “9” (such as Rs. 99 instead of Rs. 100), using “sale” or “discount” tags to make customers feel
like they are getting a deal, and using pricing that creates a perception of high quality or exclusivity (such
as Rs. 1 lakh for a product). Freemium pricing: This strategy involves offering a basic product or service
for free, while charging for premium features or advanced versions of the product. An example of
freemium pricing in India is the music streaming service Gaana, which offers a basic version of its service
for free with ads, but charges for an ad-free premium version with additional features. Geographic
pricing: This strategy involves setting different prices for products or services based on the location of
the customer. For example, companies may charge higher prices for products sold in metro cities like
Mumbai, Delhi, and Bangalore, and lower prices for products sold in smaller towns and rural areas. Cost-
plus pricing: This strategy involves setting prices based on the cost of producing the product or service,
plus a markup for profit. An example of cost-plus pricing in India is the pharmaceutical industry, where
companies set prices based on the cost of research, development, and production, plus a markup for
profit. Loss leader pricing: This strategy involves setting prices for certain products or services below the
cost of production, with the aim of attracting customers to purchase other, higher-priced products or
services. An example of loss leader pricing in India is the retail industry, where stores may sell certain
products at a loss to attract customers and encourage them to buy other products with higher profit
margins. Contribution margin pricing: This strategy involves setting prices based on the contribution
margin, which is the amount of revenue left over after subtracting the variable costs of producing the
product or service. This strategy helps businesses to set prices that cover their variable costs and
contribute towards their fixed costs and profits. Time-based pricing: This strategy involves setting
different prices for products or services based on the time of day, day of the week, or season. For
example, movie theaters in India may charge higher prices for weekend screenings compared to
weekday screenings, or hotels may charge higher prices during peak tourist season. Freemium with
advertising: This is a variation of the freemium pricing strategy, where a basic product or service is
offered for free, but supported by advertising revenue. An example of this strategy in India is the online
education platform Byju’s, which offers a free version of its app with limited content, but generates
revenue through advertising and premium subscriptions. Price bundling: This strategy involves offering
several products or services together at a discounted price. An example of price bundling in India is the
telecom industry, where mobile network operators may offer bundled packages of voice, data, and SMS
services at a lower price than if each service was purchased separately. Dynamic pricing: This strategy
involves adjusting prices in real-time based on supply and demand, customer behavior, and other
market factors. An example of dynamic pricing in India is the airline industry, where prices for flights can
vary widely based on factors such as the time of day, day of the week, and the number of available
seats. Value-based pricing: This strategy involves setting prices based on the perceived value of the
product or service to the customer. An example of value-based pricing in India is the luxury car market,
where high-end automakers like BMW and Mercedes-Benz price their cars based on the perceived value
of their brand, performance, and features. Pay what you want pricing: This strategy involves allowing
customers to pay whatever they want for a product or service. An example of pay what you want pricing
in India is the music industry, where independent artists may allow fans to download their music for free
or pay whatever they want.

Yield Management System Yield management is a pricing strategy that involves adjusting prices based
on the demand for a product or service in order to optimize revenue. This system is commonly used in
industries such as airlines, hotels, and car rentals, where prices can vary depending on factors such as
time of day, day of the week, and season. The objective of yield management is to sell products or
services at the highest possible price, while still filling as many seats, rooms, or vehicles as possible. Here
are some key features of the yield management system: Dynamic pricing: Yield management involves
setting prices that are dynamic and can change based on demand. For example, airlines might offer
cheaper fares for flights on weekdays and during off-peak seasons when demand is lower, while
charging higher prices for flights during holidays and weekends. Forecasting demand: To implement
yield management successfully, companies need to have a good understanding of demand patterns and
be able to forecast demand accurately. This involves analyzing historical data, market trends, and other
factors that can affect demand. Segmentation: Yield management requires segmenting customers into
different groups based on their willingness to pay. For example, airlines might segment customers into
business and leisure travelers, and offer different prices and services to each group based on their
preferences. Capacity management: Yield management requires managing capacity effectively to ensure
that products or services are utilized as efficiently as possible. For example, airlines might use
overbooking to fill seats that would otherwise go unsold, while hotels might offer last-minute discounts
to fill rooms that would otherwise remain empty. Some examples of companies that use yield
management: Airlines: Airlines use yield management extensively to optimize revenue. Airlines use
complex algorithms to analyze data on flight routes, seasonality, competition, and other factors to
determine the best prices to charge for each flight. Hotels: Hotels also use yield management to adjust
prices based on demand. For example, hotels might offer discounted rates for last-minute bookings or
for stays during off-peak seasons. Car rentals: Car rental companies also use yield management to adjust
prices based on demand. For example, car rental companies might offer cheaper rates for weekend
rentals, when demand is lower, and charge higher prices for rentals during busy periods like holidays. By
altering pricing in response to demand, the yield management system is, for the most part, an efficient
approach for businesses to maximise their revenue. Companies can establish rates that optimise income
while still packing as many seats, rooms, or cars as possible by using dynamic pricing, anticipating
demand, segmentation, and capacity management.