Methods of setting prices

When setting prices, it is important to make a distinction between the consumer market (B2C) and the B2B market.  While in the consumer market, product prices are often comparable and psychological factors play an important role; in the context of the provision of services between professionals, prices and rates are often less transparent and aspects such as credibility, customised work, image, and brand reputation may be significant for setting the price.

Setting the price based on the purchase price

Many companies determine the price of their products based on the purchase price plus production costs, including indirect costs.  This practice is also called the "cost-plus method".

Setting the price based on the competition

In this context, the company sets the price based on that charged by the competition: it matches the prices currently on the marker or knowingly sets the price just above or below the average

Setting the price based on the customer or on demand

Here, the company bases the price on that which the customer deems to be acceptable for the product.  Each consumer estimates the price of a given product personally.  This is called the reference price.

 

The ideal way to set a price is a combination of these three methods.  The company wanting to set a correct price must consider what the buyer wants to pay.  It will probably be necessary to analyse the competition's prices to do this.  And because the company wants to make a profit, it must also make sure that in the long term the sale price results in a beneficial margin relative to the purchase price.  In other words: know your customers, know your competitors, know your costs.

The ABC method (Activity Based Cost) is a useful tool for calculating the purchase price more precisely.  It allows you to identify overhead generators (calculation of cost factors). This costs analysis will give you a better idea of the costs and benefits of the company's different activities. Up until now, only companies active in industrial production used the ABC method. But, in theory, the method is also suitable for companies providing services. 

Updated 28/07/2017

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