Selecting a Pricing Method
Given the customers’ demand schedule, the cost function, and competitors’ prices, the company is now ready to select a pricing method. There are three major considerations in price setting: costs, competitors, and customers. Costs set a floor for the price. Competitors’ prices and the price of substitutes provide an orienting point. Customers’ assessment of unique features establishes the price ceiling.
Companies select a pricing method that includes one or more of these three considerations. We will examine five price-setting methods: markup pricing, target-rate-of-return pricing, economic-value-to-customer pricing, competitive pricing, and auction-type pricing.
Markup Pricing
The most elementary pricing method, ...
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