Cost – based
Competition – based
Market - led
Cost-plus
Price leadership
Penetration
Marginal cost
Predatory pricing
Skimming
Contribution cost
Going rate
Price discrimination
Full cost (absorption cost)
Loss leader
Psychological pricing
Promotional pricing
COST-BASED
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Cost-plus pricing refers to adding a
percentage to the original price of the
product to make more profit.
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Simple and easy to calculate
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Example: firm buys product from
wholesaler for $40, and adds a 50%
markup to the product (selling it for $60).
Firm makes a profit of $20.
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Calculates the cost of supplying an extra unit of
output in order to determine a suitable price.
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Fixed costs, do not change as output level changes
(fixed and indirect costs are excludable).

Similar to cost-plus pricing (except it’s pricing method
involves looking at the contribution made from the
sale of each product).
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E.g. selling price = $8
direct costs = $3 per unit
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Contribution pricing is fixing prices based on the variable costs of
producing a good or service in order to make a contribution
towards fixed costs and products.
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Contribution pricing is widely used by:
- multi-product firms that would find it almost impossible to allocate
fixed costs accurately between different products,
- firms that want to attract new orders from potentially important
customers, and/or
- companies that want to sell off stock to make way for new
inventors.
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A price set by calculating the unit cost for a product (fixed and
variable costs) and then adding a fixed profit mark-up.

Often used by firms making a single type of product. For multiproduct firms, full cost pricing needs to be allocated to each
product (including fixed costs and full cost calculation).

Fixed price + (units of products x variable cost) = Total cost of
product

Cost per unit = total cost of product / units of products

The cost per unit is the least value the business should charge
customers for their product(s). The firm will need to add a markup to this to make a profit.
COMPETITIONBASED

Price leadership is a strategy which is
mostly used by the best selling products
or brands. In this case there are very few
substitute products from the customer’s
point of view. Dominating firms can set
their own prices. The competitors of the
dominating firm then follow them and set
their prices based on the prices set by
the price leader aka market leader.
Predatory or destroyer pricing is a strategy
used by industries to try and force other
industries out of the market.
 New firms that enter the market keep
undercutting other competitors prices in
order to force competitors out of the
market.
 Current firms can get rid of new competitors
by temporarily dropping prices. By doing
this they later have an increased dominant
position, allowing them to increase prices
even further than the original.

Predatory pricing can most of the time
benefit customers for a limited period of
time in which it takes place.
 In some countries this is illegal (U.S EU)
because it can lead to new firms kicking
out strong based older firms and it will be
considered unfair.
 A similar strategy is called the limit pricing
strategy because they drop prices just
enough to kick out the opposition.
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The term “going rate” refers to the
average price set by the competitors in
the industry.

Going rate pricing is a method of pricing
were a firm charges a similar prices to
that of competitors for their goods and
services.
MARKET-LED
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Penetration pricing is a strategy that is used by firms
when introducing or establishing a new product in
the industry.
It involves setting relatively low prices in order to gain
market share and for the product to gain brand
awareness.
As the product begins to establish itself, the
organization can raise the price.
This kind of strategy is suitable for mass market
products.
It is also suitable for new businesses that are trying to
enter a well established market.
It is highly suitable for products that have a high price
elasticity of demand, where lowering the prices will
lead to a higher sales volume.

Skimming refers to setting a high price on
a new product. This is usually because
the business has a unique product.

The aim of this strategy is to take
advantage of having no other similar
products in the market
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Occurs when the same product or service is sold in different markets at
different prices.
Perfectly legal
Product – essentially same, prices – different
Also called – variable pricing
Commonly seen during ‘peak periods’ – increased demand, firms know
- low PED
Three conditions to be met for successful price determination:
Firm should be monopolistic – price-setting powers
Customers should have different PED’s.
Separate market so there is no resale.
Eg: Airline ticket
Different for adults / children
Legal to charge different prices/
Same product, different prices – business class / first class.
High prices during peak periods.
Separate market because resale is not possible.
Loss leader pricing is a strategy used by
selling products at its cost value or below.
 This can be considered as a short term
strategy that aims to make prices really low
to attract customers into the store and also
buy more profitable products at the same
time.
 As it is hard for customers when entering a
shop to buy only one product, supermarkets
and large shops tend to use this all the time.

They make a profit by a smart way, they sell
the main product at a low price (usually at
production cost or lower), and then sell its
supplements (what you need to buy to use
the product), at a higher price.
 An example is like PlayStation 3, the gaming
console itself costs around $600 to produce,
they sell it at $300-$500, and then sell CD’s
and joysticks at high prices like $70,
because they have to buy these sub
products to use the main product.
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Strategy that incvolves using prices - $9.99 /
$14.99
Make prices seem lower than $10 / $15
Make customers feel like they are getting a
bargain / better price for product
Widely used method
Works for almost any product
Works well when products sold in large
quantities
Does not work well with taxi services –
unsuitable for customers or providers to pay in
$0.99

Often used when marketing new products by
charging a low price to attract customers to try the
product and to build brand awareness.

Used to gain market share or sell off extra/excess
stock e.g. (buy one, get one free)

Usually operates in a limited period just to boost sales
during times where there is low demand (or maybe
to support the opening of a new store).

Very similar to discount pricing (both attempt to raise
market share by lowering prices).