There are different ways of pricing that can be considered to meet the objectives related to profits. These are discussed below:Cost based Pricing: these are the pricing strategies that are linked to the cost of production of the products. A certain percentage for the desired profit margin is set over the cost of the product. There are two types of pricing strategies under cost based pricing i.e. cost plus pricing and mark-up pricing. The cost plus pricing refers to an addition of certain profit to the total cost. This is the simplest method in which the expected profit is considered irrespective of the cost incurred in production. Under the mark-up pricing, a certain percentage of the cost is added to the cost of the product. The mark-up percentage is linked to the returns that are expected (Avlonitis and Indounas, 2005).
Competition based pricing: Such pricing method is employed in competitive markets. In this pricing method, the companies generally set the price according to the variable cost. The average cost pricing is one of the competition based pricing that is considered. In this pricing method, the prices are set close to average the cost of production. Under this, normal or marginal profits are earned. Such pricing methods are employed for maintaining the sales or the market share. These are employed to be competitive in the market or while entering new markets. Thus such pricing methods are also termed as penetration pricing (Teplická, 2015). The penetration pricing is quite beneficial in case the price elasticity of demand is high.
Demand based pricing: This refers to linking the price of the product to the demand in the market. In case the demand increases, the price will also increase and the price is reduced if the demand falls. Such pricing needs to be dynamic and market assessment needs to be proper and accurate. This is kind of price discrimination. The other aspects related to price discrimination are discussed later.