4.5.3—Pricing methods

Cost-plus sets price from cost: price = unit cost × (1 + mark-up percentage). Penetration uses a low launch price to build adoption; a loss leader prices selected items very low to attract wider purchases; predatory pricing deliberately seeks to drive competitors out; premium pricing uses a high price to signal quality or exclusivity.

Cost-plus is simple and protects the intended mark-up but ignores demand and competitors. Penetration can build volume and market share but needs capacity and a credible route to higher margins. A loss leader works only if extra purchases cover the sacrificed margin. Premium pricing needs differentiation and customers willing to pay. Predatory pricing risks losses, retaliation and legal or ethical challenge.

Evaluate suitability using the business objective, unit costs, demand, competition, positioning, available capacity and product-life-cycle stage; then consider how customers and rivals may respond.

If a product costs $20 per unit and the firm applies a 25$20 × 1.25 = $25. This covers the planned mark-up only if the$20 unit-cost estimate and expected sales volume are realistic.

A temporarily low price is not automatically penetration, a loss leader or predatory pricing: distinguish launch adoption, attracting linked purchases and eliminating rivals by the purpose and context.