Best Pricing Methods

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It is likely there is no single pricing method that is best to use in every situation. There are so many variables and situations to select one as the only preferred method is not feasible. Instead, if it is necessary to identify two of the best pricing strategies, it may be best to consider which are often used and determine why. In this case, it may be that they are the standard markup and cost-plus methods. The two are similar, except one is used most often in retail settings where there are many different products and competitive pricing is necessary, and the other in construction or similar businesses, where one big project may be the basis for determining the starting point for the price.

The standard markup method is one of the best because it is so simple. In businesses with many products, like a big-box retailer or grocer, it is probably not possible to figure out item by item what the demand is and set the optimal price accordingly. It is most efficient to mark up every item by a certain percentage (or perhaps a range of percentages). Similarly, cost-plus pricing is as simple. To use the construction example, if the new casino costs $100 million to build, the price to the client may be $120 million. The 20% difference is like the markup on the can of beans at the grocer.

Determining the inelastic price for a good is more appropriate in the case of the can of beans than in the case of the casino project. It is unlikely that the cost of building the first casino will be like the next, and so it is not practical to determine what a 1% variation in the price will do to demand. In contrast, the can of beans is generally the same from lot to lot. As well, it is such a commonly used foodstuff, nearly a staple, that it is likely demand will not increase more than 1% due to a decrease in the price of 1%. If the can of beans costs $.99 usually, reducing the price to approximately $.98 is unlikely to move the needle much on the demand side. In determining inelastic prices for a good, it is probably best to consider the nature of the item, rather than attempting to set an inelastic price on the item