Describe, compare, and contrast the three major bases for setting prices.

Question

What will be an ideal response?

Answer 1

The three major dimensions on which prices can be based are cost, demand, and competition. When using cost-based pricing, the firm determines price by adding a dollar amount or percentage to the cost of the product. Two common cost-based pricing methods are cost-plus and markup pricing. Demand-based pricing is based on the level of demand for the product. To use this method, a marketer must be able to estimate the amounts of a product that buyers will demand at different prices. Demand-based pricing results in a high price when demand for a product is strong and a low price when demand is weak. Compared with cost-based pricing, demand-based pricing places a firm in a better position to reach high profit levels, as long as demand is strong at times and buyers value the product at levels sufficiently above the product's cost. In the case of competition-based pricing, costs and revenues are secondary to competitors' prices. This is a common method among producers of relatively homogeneous products, particularly when the target market considers price to be an important purchase consideration. A firm that uses competition-based pricing may choose to set their prices below competitors' or at the same level. Competitors believe that Amazon's competition-based pricing model has been an attempt to gain monopoly control of many retail markets. Amazon uses highly sophisticated analytics to gauge consumer demand and compare its prices to competitors.