TYPES OF PRICING

PEAK LOAD PRICING

Peak Load Pricing is a pricing strategy where prices are raised during periods of high
demand.
The primary goal of Peak Load Pricing is to control demand during peak times and achieve
optimal allocation of resources. This principle is often applied in various sectors such as
electricity, transportation, and telecommunications. This strategy tends to encourage
consumption during off-peak periods, where prices are significantly lower.

Life Cycle of Product and It’s Stages (With Diagram)

A product processes through a number of stages, such as from introduction to growth,
maturity, and decline.
This sequence of stages is called Product Life Cycle (PLC). The PLC influences the
marketing strategy and marketing mix of an organization.

The life cycle analysis of a product enables an organization to make efficient pricing policies
with respect to each stage of the product. Moreover, it plays a crucial role in various
organizational functions, such as corporate strategy, finance, and production.
Stages of Product Life Cycle
The different stages of PLC (as shown in Figure-11) are explained as follows:
i. Introduction:
Refers to the initial stage where an organization creates awareness among customers about
the availability of a product and develops a market for the new product. The sales of the
organization during this period are constant. In this stage, the pricing policy depends upon the
availability of dose substitutes. Moreover, in this stage, the prices are either fixed higher to
cover the production cost or low to attract customers.
Figure-12 shows strategies that are used in the introduction stage of a product:
The two types of pricing strategies in the introduction stage (as shown in Figure-12) are
explained as follows:
ii. Price Skimming:
Refers to a pricing strategy in which a producer sets high prices initially when the product is
newly introduced in the market. After that, there is a gradual reduction in the prices of a
product. This strategy is used to capture maximum consumer surplus and spread profits over
a period of time.
iii. Penetration Pricing: Refers to charging minimum price for a product for gaining large
market share. In this strategy, it is expected that customers switch to the product because of
lower price.
The main benefits of penetration pricing are as follows:
a. Discourage the entry of competitors as low prices do not suit them
b. Results in the fast adoption of products
The limitations of penetration pricing are as follows:
1. Raises the expectations of customers that the prices will remain low for a long period
2. Creates a low-profit margin that makes it difficult for the organization to survive
3. When the objective of penetration pricing is achieved, the price of the product is increased.
iv. Growth Stage:
Implies a stage where the focus of the organization is on lowering the cost of production. At
this stage, there are various substitutes of products available in the market leading to
competition. The product is exported to other countries to gain economies of scale and
market share.
v. Maturity Stage:
Refers to the longest stage in the product life cycle. In the maturity stage, the growth in the
sale of the product slows down because the price competition increases in the foreign
markets. As a result of this, the organizations shift their manufacturing facilities to the
countries where the cost of labor is low to reduce cost of production.
In this stage, the organizations that lose the market share exit from the industry. In the
maturity stage, the promotion plays a great role in increasing the product sale. In such a
situation, organizations should try to explore the new uses of the product.
vi. Decline Stage:
Implies a stage in which the growth of the product in the market is declining at a fast pace. In
this stage, sales and profits of the organization decrease because of new products and
technologies are introduced in the market. A product produced by an organization may have
different stages in different countries at the same time. For example, a product may face
growth stage in one country and decline stage in another country. In such a situation, loses in
one country’ can be covered by the profits earned in another country.

Multiple Pricing Definition

Multiple pricing refers to the practice of offering more than one price for the same product.
The supplier charges different prices based on:
• Ordered Quantity
• Type of customer
• Delivery time
• Payment terms etc.
For example, small-time fruit and vegetable vendors often offer different prices for different
quantities bought- e.g. 2 guavas for Rs. 10, 5 guavas for Rs. 20. This is done to incentivize
consumers to buy more of the product. Similarly, in flea markets, the vendors don’t have
display prices for most products and charge customers based on their perception of their
willingness to buy or propensity to spend. Tourists are often charged more because they are
not aware of the actual value or price.
Cost-Based Pricing
Cost-based pricing or markup pricing is a pricing strategy that companies utilize to first
determine the production costs of an item and then by adding a percentage on top of that cost
they decide the selling price of that item. It is also known as markup pricing.
In this pricing model, a markup is added to the cost of that product itself to get the selling
price. This markup is a percentage of the total cost. The goal here is to ensure that the seller
sets a higher price for the services or products provided to the customer than it costs to
produce to make profits from its sales.
Definition – Cost-based pricing is defined as a pricing method in which the selling pricing of
goods or services is based on their cost of production, manufacturing, and distribution. In the
pricing cost-based, a profit percentage or fixed profit figure is added to the cost of the goods
or services that decides their selling price.
Types of a Cost-based Pricing Strategy
Different types of cost-based pricing are –
1. Cost-Plus Pricing
In cost-plus pricing, a company or manufacturer will add a fixed percentage of the total costs
as the markup to arrive at the selling price. As a result, this method is also known as the
average cost pricing and is the simplest pricing method. The standard markup here accounts
for profit as well.
The formula to calculate the cost-based pricing is-
Price = Unit Cost + Expected Percentage of Return on Cost

2. Break-Even Cost Pricing

Under the break-even cost pricing approach, the company’s main objective is to cover its
fixed cost. Industries with high fixed costs resort to such pricing strategies. This is the level
where a company breaks even or the point where there are no profits or losses. Industries like
the aviation industry have extremely high fixed costs and hence, use this pricing strategy.
The formula for calculating break-even cost pricing is-
Price = Variable cost + Fixed Costs / Unit Sales + Desired Profit
3. Markup Pricing
In this type of pricing, the reseller adds a certain amount of the cost to get the selling price.
Retailers usually apply such a pricing strategy to determine their selling prices.
The formula for calculating the markup pricing is-
Price = Unit Cost + Markup Price
Here, Markup Price = Unit Cost / (1-Desired Return on Sales)
4. Target Profit Pricing
Under the target-profit pricing method, a company will first determine the target profit they
want to achieve in a month, quarter, or even a financial year. As per this target profit, the
selling price is determined. This method even determines the number of units to be sold to
achieve the predetermined profits.
The formula for target profit pricing is-
Price = (Total Cost + Desired Percentage of Return of Investment) / Total Units Sold
Benefits of cost-based Pricing Method
The following are the advantages or benefits of a cost-based pricing method:
 Easy to understand and easy to calculate
 Ensures that a company generates profits even when costs rise by charging a markup
that meets all expenses
 Covers all incurred costs such as production and overhead costs
 Can be applied to different products and services like customized products and even
new and innovative products
  Offers a fair and logical way to price products. If customers are aware of the costs of
the product, then they will understand such prices
 Allows companies to bid for large projects quickly as it simplifies investment
appraisal decisions.
 A price increase can easily be justified with this pricing method. A company can
inform its customers that the costs to produce the product or service have increased.
Disadvantages of cost-based pricing methods
The following are the disadvantages or drawbacks of a cost-based pricing method:
 Disregards demand and price elasticity of demand. This reduces the bargaining power
and the importance of the consumer
 Turns a blind eye towards the prices charged by competitors. As a result, it ignores
the competition
 Ignores the demand, it is inflexible when there are changes in demand levels. Prices
do not change with changes in demand levels
 Takes sunk costs and unavoidable costs in its calculation as well
 Prone to underpricing or overpricing
 Reduces the incentive to be more efficient
 Allows companies to pass their costs on to their customers
 Ignores the opportunity cost or the cost of the following best alternative foregone
investments
 Full Cost Pricing
 Full Cost Pricing is based on the estimated unit cost of the product with the normal
level of production and sales and usually adopted by manufacturer firms. A profit
margin is added to this unit cost.
 This methods of pricing use standard costing techniques and work out the variable
cost and fixed costs involved in manufacturing, selling and administering the product.
The selling price of the product is decided by adding the required margin towards
profit to such total costs. It is also known as Absorption Cost Pricing.
 The advantage of full-cost pricing is that as long as the market consume the
production at the determined price, the firm is assured of its profits.
 The disadvantages of full-cost pricing is that the method does not take cognizance
of the demand factors at all and relies excessively on standard costing and normal
level of production and sales.
 Marginal Cost Pricing
 Marginal-cost pricing involves basing the price on the variable costs of producing a
product, not on the total costs.
 Fixed costs: capital equipment repayments, factory rental, and permanent staff
salaries, short or medium term, remain unchanged regardless of the level of output
achieved.
 Variable costs: wages and electricity, raw material purchases which vary directly
according to the level of output achieved.
  Total costs = Fixed costs + variable costs
 The major difference between full cost pricing and marginal cost pricing is that the
marginal gives the flexibility not to recover a portion of the fixed costs depending
upon the market situation.

Competition-based pricing
Marketers will choose a brand image and desired market share as per competitive reaction. It
is necessary for the marketer to know what the rival organisation is charging. Level of
competitive pricing enables the firm to price above, below, or at par and such a decision is
easier in many cases
Below are the methods of pricing that are commonly used under Competition-based pricing
Discount Pricing
Traders or buyers were offered price concessions in the form of deductions from the list price
of from the amount of a bill or invoice. These are forms of indirect price competition.
The common forms of discount pricing are:
 Trade Discount: It is given to the buyers buying for resale, for example, wholesaler or
retailer.

 Cash Discount: It is a rebate or a concession given to the trader or consumer to

encourage him to pay in full by cash or cheque within a short period of the date of the
bill or invoice.

 Quantity Discount: These are given to the customer to encourage to make bulk or
large purchases at a time.

 Quantity Discount: These are given to the customer to encourage to make bulk or
large purchases at a time.

 Seasonal Discount: Additional seasonal discount for example 10%, 15% are offered
to a dealer or a customer.

Premium Pricing
Premium pricing is the practice in which a high-end product is sold at higher than that of
competing brands to give it a snob appeal through an aura of exclusivity. It also referred to
as skimming, image pricing or prestige pricing.
The firm may decide to charge a high initial price to take advantage of the fact that some
buyers are willing to pay a much higher price than others as the product is of high value to
them.
The skimming pricing is followed to cover up the product development cost as early as
possible before competitors enter the market.
Going Rate Pricing
Going Rate Pricing is also known as Parity Pricing. In this method, the firm bases its price on
the average price of the product in the industry or prices charged by competitors. This method
assumes that there will be no price war within the industry. It is commonly used in the
oligopolistic market.
Cyclical pricing
Cyclical pricing refers to the trend of stock prices in cyclical companies following the trends
in the overall economy. Cyclical stocks are tied to the cyclical movements of the economy
and are often more volatile than non-cyclical stocks. When the economy grows, prices for
cyclical stocks go up, and when the economy turns down, their stock prices will drop. They
follow all the cycles of the economy from expansion, peak, and recession all the way to
recovery.