There are two main types of pricing methods, these are: cost based pricing methods and market orientated pricing methods.
With cost based pricing methods, no account is taken of market requirements but a set amount is added to the costs. The disadvantage is that if costs increase, the price of the product must also increase. The following are examples of cost based pricing methods:
Absorption cost pricing: Used mainly in large department stores. The price of each product is dependant on how many costs it creates.
Target pricing: A target price is made and then costs are adjusted so that that price can be achieved.
Market based pricing methods depend on accurate analysis of the market and consumer requirements. The following are examples of market based pricing methods:
Penetration pricing: Used for new products wanting to gain market share. The product is priced low so that it is able to get a hold in the market.
Market skimming: When a new innovative product is bought out - during the first few months high prices can be charged as there is little competition and the product is popular because it is new.
Loss leader pricing: Charging below cost price to try and attract customers to other products (normally in supermarkets).
Psychological pricing: Hitting price points that are significant e.g. £99.99 sounds better than £100.00
Price discrimination: Charging different people different prices for effectively the same product. Normally time based (charging different prices at different times of the day / week / year)
Discount pricing: Offering lower prices for a set time period to try and boost sales and sell off unwanted stock.
There are two types of competition based pricing methods:
Going rate or market pricing: Charging the same as competitors or the market leader.
Destroyer or destructor pricing: Charging a price below average to drive out competition.