Pricing Models

If you are new to the pricing game here is a brief overview of the top three pricing models

Cost Plus:

During WW2 many contract prices were often determined on a "cost plus" basis. A predetermined margin was added to the products production cost in order to set the price. During peace time and a "free market economy" such an approach is probably not optimal and it is questionable even in time of national need.

Market Pricing:

Market pricing involves establishing the value of your product or service within the market. The main objectives of market pricing involve;

Estimating manufacturing volumes requires some serious input marketing research. A famous 1980's marketing story involved then Toy Manufacturer Coleco who announced the Adam computer in June 1983 at the Summer Consumer Electronics Show (CES) and executives predicted sales of 500,000 units by Christmas 1983. From the time of the computer's introduction to the time of its shipment, the price increased, from USD $525 to $725. The Adam received some good reviews based on the quality of its keyboard and printer, and offered competitive sound and graphics. However, sales were weak, especially after technical issues began to surface. Coleco lost $35 million in the fourth quarter of 1984 as returns flooded in. Officially, Coleco blamed "manuals which did not offer the first-time user adequate assistance. Coleco reintroduced Adam with a new instruction manual, lower price, and a $500 college scholarship along with each unit for use by a young child (to be paid when the child reached college). Less than 100,000 units ultimately sold. The Adam was discontinued in1985, less than two years after its introduction This single product weakened Coleco so much that the company filed for bankruptcy in 1988.

Discounted Pricing:

Discounted pricing is where you start by looking at market pricing to establish a suggested retail price (SRP). You start with this because this is what you estimate your customers will be happy to pay for your type of products.
This SRP may bear little resemblance to the actual unit price you will receive for the product, there are some operators in various markets selling at 90% discounts off their SRP which at first sight seem absurd.... but SRP simply is the best place to start.... at the end customer from whom all demand is derived.

Example: Kitchen Countertop Appliance with an SRP of $200

Assume you are the manufacturer and you are going to want to supply this appliance globally via retail outlets and retailing catalogues, and via distributors selling other items. Each step the product makes must make a margin to cover that steps distribution and logistics costs etc...
Example route to an overseas market into retail outlets.
Starting at the end customer who buys from retailer for the SRP of $200 The retailer whose revenue is $200 per unit sold buys from a wholesaler at a 50% discount off SRP or SRP$200 x 0.5 = $100 leaving the retailer a margin $100 per unit sold above purchase cost to cover their costs of selling and logistics with their multiple local stores.
The wholesaler who gets $100 total revenue per unit sold to retailers, buys from import/export sales agent expecting to make a 20% margin (less because they are handling in bulk and logistics are therefore simplified), buys at $80 each from the import/export sales agent making $20 each to cover their costs.
The import/export sales agent who makes $80 revenue each when selling to wholesalers, buys the unit direct from the manufacturer expecting to make a 15% margin because of their extensive links with wholesalers in the target country but minimal logistics, they buy at $80 x 0.85 = $68 each. So having researched and established this route to that market for this product the manufacturer can plan to expect that "import/export sales agents" be offered terms equivalent to $68 of the SRP of $200 which could be described as "0.34 of SRP" or a 66% discount off SRP.
Note: The Manufacturer will know that to sell through that channel they can expect to get $68 each for these Appliances which end customers like you or I pay the SRP of $200 each for in the stores. (these figures were made up for example purposes).
If the direct costs associated with making this product are parts $25, labor $10, plus direct tooling and machinery capital writing down costs of $5 per unit making a total product (production) specific unit cost of $40 The manufacturer will make a gross margin of $28 per unit or 28/68 = a 41% margin.
From this 41% margin, $28 per unit, the manufacturer must be able fund all their fixed costs including management and administration, production management, development engineering, their own sales and marketing efforts, buildings etc etc.... I will leave this example here but you can easily see the extra value in the chain that may be released for the manufacturer when selling in their own home market should they be able to remove one tier from their supply chain if they can achieve that without losing market access and relative volumes.

Summary

Pricing models such as "discounted pricing" exist to cope with the many and various supply channels available. If you are a manufacturer, producer or brand owner, bearing this system in mind from the start and evaluating your supply chain using it may save you much aggravation later. If you are unable to force your view of the world onto independent operators in the supply chain then returning to your "discounted pricing model" and feeding reality back into it will at least allow you to learn where the money is being made and may illuminate decisions on vertical integration or alternative supply channels like for example e-commerce or other direct selling methods.

There are many and varied ways to define your market but at least one of your routine methods should measure the end customer price level and end customer market value to ensure you see the picture enlarged by the effects of the supply channel you are using.