I. Cost plus
II. Competitive
III. Rate of return
IV. Trial and error
Codes :
Understanding Informal Pricing Methods
Informal pricing methods are less structured approaches used to set prices. They often rely on observation, experimentation, and market feedback rather than strict calculations.
Analysis of Pricing Methods
Let's examine each method mentioned:
- I. Cost plus pricing: This is a formal method. It involves calculating the total cost of producing a product or service and adding a standard markup percentage to determine the selling price. It is systematic and formula-based.
- II. Competitive pricing: This method involves setting prices based on what competitors are charging for similar products or services. While it can involve analysis, it often requires market observation and quick adjustments, aligning it with informal strategies, especially when reacting to competitor moves.
- III. Rate of return pricing: This is a formal method where the price is set to achieve a specific target rate of return on investment. It is calculation-intensive and goal-oriented.
- IV. Trial and error pricing: This is a distinctly informal method. Businesses experiment with different price points, observe customer reactions and sales volume, and adjust the price accordingly. It is adaptive and lacks a predefined formula.
Conclusion on Informal Methods
Based on the analysis, the informal pricing methods are:
- Competitive pricing (II): Prices are set relative to competitors, often involving market observation and adjustment.
- Trial and error pricing (IV): Prices are determined through experimentation and observation of market response.
Therefore, methods II and IV represent informal pricing approaches.
Important Questions from Pricing decisions
Penetration pricing strategy delivers results:
(A) Where price quality association is weak
(B) When the product is perceived as a 'high technology' product
(C) When the market is characterised by intensive competition
(D) When the firm uses it as an entry strategy
Choose the most appropriate answer from the options given below:
In which of the following pricing policies, a firm charges higher initial price for the product and reduces it over time as the demand at higher price is satisfied?
Pricing practice of setting a price target and then developing a product that would allow the firm to maximise total profit at that price is called:
Which among the following is not an internal factor in pricing decisions?
Match List I with List II:
List I (Pricing Strategies) List II (Description) (A) Ramsay pricing (I) Setting a high price when a product is first introduced and gradually lowering price as it gains scale (B) Price skimming (II) Firm charges lower price (than the ongoing price) to gain market entry (C) Cost plus pricing (III) Price deviations from marginal cost should be inversely proportional to price elasticity of the product (D) Penetration pricing (IV) It is full cost pricing strategy that also includes mark up for target return, degree of competition, price elasticity and availability of substitutes. Choose the correct answer from the options given below:
