The pricing of marketing products is a convoluted subject but it is very useful for marketers; therefore, I’ll explain the intricacies involved with the pricing of marketing.
You don’t need to understand all the pricing methods but you should know what pricing methods there are. The first is Cost Plus Pricing which figures out the unit cost and margin of profit but ignores behavior and demand of the product. The second is Break Even Analysis which finds the break even point, the quantity at given price to break even, the total revenue, and total cost. However, you should briefly understand Marginal Analysis which considers the unit cost, behavior, and demand of the product. The Marginal Analysis chart is shown below. MC is the marginal cost, MR is the marginal revenue, AC is the average cost, and AR is the average revenue. Where the profit maximizing price meets marginal cost is the unit profit. The rectangle between P1 and C1 is noted as the Monopoly profit which refers to the profit maximization between unit profit multiplied by the quantity. So as long as the price exceeds average cost, the marginal unit is profitable. The Marginal Analysis pricing method is the best method available because it considers demand, unit cost, behavior, and the range of profitable prices.
The two applicable pricing strategies are Skim-the-cream pricing and Penetration pricing. Skim-the-cream pricing also known as the market-skimming pricing, is essentially pricing the product high. The Skim-the-cream pricing strategy should be used if the product is in the intro stage of the product life cycle, lacks economies of scale, you’re unsure of the nature of demand for this product, you must recoup product development costs, or you are targeting a specific segment with inelastic demand for the product. Penetration pricing in opposition prices the product low. Penetration pricing should be used if the product is within an already well known product category, there is economies of scale, to forestall competition with difficulty of barrier to entry, or you are also targeting a specific segment but with elastic demand for the product. The pricing strategy is rather simple unless your product’s criteria doesn’t fall into the requirements for either strategy.
The two areas of pricing policies are discounts and geographic pricing. Within discounting, there are quantity discounts, cash discounts, and trade discounts. Quantity discounting is either cumulative or noncumulative. Cumulative refers to an over time period for repeat business and noncumulative refers to a single purchase. Cash discounts involves credit incentive to pay sooner and is usually noted in the format of 2/10 net 30 AOG which means get 2% off if paid in 10 days or 30 days from the arrival of goods. Trade discounts are a bit convoluted similar to marginal analysis so you should just understand that these trade discounts take place throughout the distribution of the product between manufacturer, wholesaler and retailer. On the other hand, geographic pricing is determined by the point of shipping or delivery depending on the agreed contract. If the contract is by shipment then the buyer pays freight cost and if the contract is by delivery then the seller pays freight cost. There are also variations such as zone pricing dividing freight charges by designated geographic regions, uniform delivered pricing that treats all of the US as one large zone with the same avg freight charges, and freight-absorption pricing that the seller pays enough freight charges to appear as a competitor to buyers.
The pricing of marketing products as you can see can be quite complex with many intricate moving parts. This article isn’t meant to give you a full grasp of pricing methods, strategies, and policies but rather to give you a foundational understanding of what makes up the pricing of the products that companies market to us everyday.
