Pricing Methods

PRICING POLICY

PRICING

Unit 1 READING AND TRANSLATION PRACTICE

Price is a very important weapon that can be used to per­suade consumers to buy. Price is one of many factors that determine the demand for a product.

How firms set the price of their goods and services is a complicated issue. A number of factors will affect the price a firm sets for its product, including such things as the cost of producing the product, the rival firms' prices, the type of product and the desired market share of the company.

The most common pricing methods adopted by firms are:

1. Cost-plus pricing is a very simple pricing method and is perhaps the most common. A firm may calculate its average costs of producing a product and then simply add a profit 'mark-up', say 10%, on to average costs. This mark-up could 1 be changed to allow for the effects of competition and eco­nomic conditions, e.g. where there is a lot of competition this: mark-up may be lowered or when business is good the mark­up could be raised.

2. Marginal-cost pricing differs from the above in that the firm looks not at its average costs but at marginal costs, i.e. the firm calculates the additional cost of producing the

next unit or set of units of output and the firm charges a price (plus a 'mark-up') according to the marginal cost. A typical example is found in the shoe repair business. There appear to be no standard prices for repairing shoes. What tends to happen is that the cobbler examines the shoes and makes a quick estimate of how much material and time it will take to repair them. Larger shoes, those made of leather-and those in greater disrepair have a higher marginal cost and therefore a higher price is charged for their repair.

3. Price discrimination: several firms are able to charge different prices for a similar product. This is known as price discrimination. British Rail (BR), for example, charges dif­ferent consumers such as businessmen and women, children, senior citizens and students different prices and also charges different prices according to the time of the journey, e.g. peak, off-peak, weekly and weekend. British Telephones (ВТ) price discriminates according to the time of day, week and distance of the call. The price charged to the consumer is made up of two elements: a fixed charge or quarterly rental, which is designed to cover BT's fixed costs, and a variable charge related to the use of the phone. The ability of a firm to price discriminates on whether it can split or segment its market. In the case of ВТ and BR this is quite straightfor­ward. Other industries and firms also price discriminate, e.g. the breweries charge different prices in the different regions of the country, cinemas offer cheap tickets for after­noon and late shows, and the Electricity Boards operate an Economy 7 system where consumers pay less for nighttime electricity.

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