Mark-up pricing / Cost plus pricing

The SP of the product is fixed by adding a margin to its cost price. The mark-ups may vary depending on the nature of the product and the market. The higher the value of the product (unit cost) the larger is the mark up.

Based on the assumption that demand cannot be known accurately but costs are known.

Absorption cost pricing (Full cost pricing)

Rests on the estimated unit cost of the product at the normal level of production and sales. It uses standard costing techniques and works out the variable and fixed costs involved in manufacturing, selling and administering the product. The SP of the product is arrived at by adding the required margin towards profit to such total costs.

Target ROR pricing

It is similar to absorption cost pricing. In absorption cost pricing, after the costs of manufacturing, selling and administration are absorbed on a per unit basis, the firm adds its mark-up towards profits. This is often decided on an arbitrary basis. Against this, the ROR pricing uses a rational approach to arrive at the mark-up. It is arrived at in such a way that the ROI criteria of the firm is met in the process.

Marginal cost pricing

Aims at maximising the contribution towards fixed costs. Marginal costs include all the direct variable costs of the product. In this method, these direct VC are fully realised. In addition, a portion of the FCs is also realised. The main difference between ACP &MCP is that the latter gives the flexibility not to recover a portion of the FCs depending on the market situation. It also gives the flexibility to recover a larger share of the FCs from certain customers, or a certain segment of the business and a smaller share from the others.

Value pricing

It is a modern, innovative and distinctive method of pricing. Rests on the premise that the purpose of pricing is not to recover costs, but to capture the value of the product perceived by the customer.

The crux of the price is that it represents the exchange value of a product. The merit of VP is the recognition that the customer is interested only in the value or worth of the product, not in its costs. VP will win customer loyalty to the marketer. And, as long as the marketer is able to deliver value in excess of his costs, his profits are also ensured.

Shekhar